Liquidity Study - Draft

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Table of contents
1 EXECUTIVE SUMMARY................................................................................................................................... 1
2 INTRODUCTION ............................................................................................................................................... 6
3 OVERVIEW OF THE CURRENT ELECTRICITY SECTOR IN BiH ................................................................... 7

3.1 Regulators and key regulatory principles 7
3.2 Electricity producers and suppliers 9
3.3 Electricity consumption and supply 10
3.4 Network and system operation 12
3.5 The balancing mechanism 12
3.6 Cross-border trade and cooperation 13
3.7 Wholesale trade, foreign market participants and neighbouring markets 13
4 THE IMPORTANCE OF LIQUID COMPETITIVE MARKETS .......................................................................... 15
5 KEY OBSERVATIONS IN BIH ........................................................................................................................ 17

5.1 Organised markets 17
5.2 Risk management 19
5.3 Balancing mechanism and imbalance settlement 19
5.4 Cross border trade 20
5.5 Implications of ETS and carbon border adjustment taxes 21
6 POTENTIAL BENEFITS OF A WELL-FUNCTIONING WHOLESALE MARKET FOR

GENERATION DISPATCH AND CROSS-BORDER TRADING...................................................................... 22
6.1 Analysis of historic dispatch 22
6.2 A closer look at the historic cross-border exchange 27
6.3 Looking towards 2025 – impact of CO2 prices 30
7 RELEVANT MEASURES TO IMPROVE LIQUIDITY AND CONTESTABILITY .............................................. 32

7.1 Establish a BiH PX 35
7.2 Coupling with neighbouring PXs 43
7.3 Measures to improve PX liquidity 48
7.4 Measures to improve liquidity and mitigate market power 57
7.5 Market access and other reforms for captive customers 64
8 PX-BASED SHORT-TERM MARKETS IN THE REGION ............................................................................... 65
9 CONCLUSIONS AND RECOMMENDATIONS ............................................................................................... 68
10 REFERENCES ................................................................................................................................................ 70
Appendix A Basic competences for the entity regulators

Appendix B Market concentration
Appendix C List of market participants
DNV – Report No. , Rev. – www.dnv.com Page ii

1 EXECUTIVE SUMMARY
The electricity generation sector of Bosnia and Herzegovina (BiH) consists of coal fired power plants, fuelled by
domestic coal, hydropower stations, a combination of storage and run-of-river plants, and a growing fleet of wind farms.
The capacity of current plants is approximately 50/50 renewable and thermal, some 4,500 MW in total. Renewable
sources deliver around 6 TWh annually; about 1/3 of the total generation in a typical year.
With 12 TWh, the annual consumption is well below the typical annual generation. Annual export of 5-6 and import of
1.5-2 TWh through a well-developed transmission network with 2,100 MW capacity1 to neighbouring countries adds
economic value to the country. Annual peak load is approximately 4.000 MW including export.
Unlike the typical situation in a lot of other South East European countries, the BiH electricity sector is not dominated by
one large utility. There are three large vertically integrated domestic power producers, suppliers and distribution network
owners, known as Elektroprivredas (EPs), which have not yet legally or functionally unbundled. These are publicly
owned by the respective BiH entities2. There are few foreign and/or independent producers but they are (slowly)
increasing their market shares. Due to the relatively high import capacity, the market concentration and the potential
market power of individual EPs is limited. However, there are no signs of real competition among the EPs for domestic
customers.
Generation prices were previously regulated. Today, these prices are deregulated in the Federation of Bosnia and
Herzegovina (FBiH), while Republika Srpska (RS) has imposed a “sunset clause” on the regulated component in the
electricity sold for universal supply over a four-year period starting in 2022, bringing legal compliance in the unbundling
of distribution and price deregulation in the electricity sector of this entity (Energy Community Secretariat, 2020).
Low-voltage customers (i.e. households and other relatively small consumers), using some 6 TWh annually, benefit from
a universal service supply arrangement, while the industrial end-users can choose retail suppliers as they wish. An
important feature of this arrangement is that retail prices are below regional market (=potential import) prices. The
average price of electricity for customers from the category of households and "other consumption", excluding VAT and
network fees, was 3.9 Eurocents/kWh in 2019.3 The average price on the Hungarian power exchange, HUPX, which is
considered as the most relevant proxy for wholesale prices in the region, was approximately 5 Eurocents/kWh.
There is no organised wholesale marketplace within BiH. The three EPs are subject to public procurement rules when
selling and buying wholesale contracts. Contracts with duration of one month up to one year are tendered, while
contracts with shorter duration are agreed upon with preselected and licensed 4 counterparts. Licensed companies can
bid for physical transmission rights in or out of the country. BiH electricity producers both buy and sell in neighbouring
markets, seeking to benefit from differences between their generation costs and market prices in these other markets.
Analyses of the historic dispatch suggest that there is scope for improvements. The total potential efficiency gain is
estimated to approximately EUR 60 million per year. The figure reflects that BiH thermal power plants sometimes
produce too much, e.g. when cheaper import would have been possible, and at other times do not fully pursue profitable
opportunities, e.g. to export. The figure also reflects scope for improvements in terms of how domestic generation is split
between different thermal units.
We find that the BiH market has scope for efficiency improvements. There are 3 large producers and vertically
integrated companies, some smaller producers, significant cross-border capacity and a growing interest in developing
renewable energy sources. Model based analyses of historic dispatch have identified a scope for further efficiency
improvements; the analyses indicate a potential gain of approximately EUR 60 million per annum. From the
1 The nominal transmission capacity of the interconnections to Croatia, Serbia and Montenegro totals 74487,448 MW. However, it is the lower net transfer
capacity (NTC) that is the relevant metric for a market analysis – this is how much can be commercially exchanged with neighbouring countries.
2 Administratively, BiH consists of two entities and one district: the entity of Federation of Bosnia and Herzegovina (FBiH), the entity of Republika Srpska (RS)
and Brčko District (BD). Brčko District is not an entity but has a specific status and is a self-governing administrative unit.
3 DNV calculations based on reports from SERC and the two EPs; The price for 2020 is approximately similar.
4 Wholesale market participants need a license from one of the three respective regulatory commissions to act in the market.
DNV – Report No. , Rev. – www.dnv.com Page 1

qualitative parts of our analysis, it seems clear that most of this efficiency potential is due to insufficient short-term
trading opportunities, lack of transparency and relatively high transaction costs. This implies that for the producers, it is
often a rational decision to ignore short-term changes in generation costs and opportunities, and instead produce
according to plans and contracts.
The lack of an organised short-term market within BiH seems to be a major explanation behind the indications of
suboptimal dispatch (production) indicated in our analyses. The absence of a liquid short-term market can also cause
inefficient investment decisions; the potential efficiency gain of improving near-term contracting options thus go beyond
the immediate dispatch effects.
The natural first step to improve further the wholesale market of BiH is thus to give the market participants access to a
power exchange for short-term trade (PX; day-ahead and intraday). This will increase transparency of wholesale prices,
reduce contracting barriers and can potentially support better organised marketplaces for long-term contracts as well. It
will also enable introduction of renewable incentive schemes like feed-in premium (FIP), and further reduce barriers to
investment in renewable energy.
It cannot be taken for granted that well-functioning short-term trading will be sufficient to ensure BiH is a fully competitive
and efficient power system. However, given the market structure and the potential for active trading among the EPs, a
liquid PX can indeed start a process that ultimately results in a quite efficient market – without traditional regulatory
measures to break up existing monopolies or oligopolies, such as requirements on incumbents to offer virtual power
plants or divest assets.
A challenge for any new PX is the extent to which it can demonstrate sufficient liquidity and build trust among
competitors and potential participants that price formation is fair and efficient. A few other liquidity boosting measures
can be considered and are explained further in the report:
1. Agreements with incumbents to submit bids and asks in an early phase (market maker agreements)
Market makers ensure that other participants will actually be able to sell or buy on the exchange. For a new
PX, it is particularly important to be able to convince potential participants that the PX is a real trading venue,
as it will have no track record that speaks for itself. A common practise among PX operators is to negotiate
voluntary deals with incumbent firms committing the latter to ensure other participants will actually be able to
buy or sell.
2. Encouraging or obliging network operators to purchase energy for network losses on the PX
Network operators are regulated entities and will anyway have to ensure the energy for network losses is
purchased somewhere. As BiH network losses amount to approximately 10 percent of the total energy
consumption, daily purchase orders from network operators will ensure potential sellers that there is at least
some demand at the PX. If/when the PX price is efficient, the societal cost of purchasing energy for losses at
the PX is zero.5 By this measure alone, the PX will have a turn-over of at least 10 percent of demand.
3. Ensuring cross-border trade pass through the PX

Most European PXs are coupled, meaning that cross-border trade to a large extent is ‘flowing’ through the PXs.
This facilitates efficient trade and adds to the liquidity of each PX. However, coupling arrangements are
complex, involve a lot of parties and take time to implement. But parts of the benefits of coupling are within
reach even before negotiations with neighbouring countries have started. Anyone seeking to import or export
electricity to/from BiH must purchase transmission rights in or out of BiH. By requiring owners of transmission
rights to sell and buy the necessary energy at the local PX, there will be a natural boost of liquidity. This will
effectively imply a major share of bilateral contracts will pass through the PX, and thus ensure a significant
5 The alternative is not to not purchase losses, but to purchase the energy somewhere else. Hence, there is anyway a societal cost for energy losses.

turnover on the PX, approximately corresponding to 50 percent of demand, but may vary depending on natural
variations in import and export due to e.g. changes in the hydrological situation, fuel prices and demand.
4. Ensuring wholesale contracts for suppliers under the public supply arrangements pass through the PX
With the current regulation, the ‘public’ suppliers receive power within their vertically integrated company or
group, or contract from other producers in regular auctions, in which prices and volumes are determined. The
result is internal or external bilateral contracts. If regulators required that such contracts must use the PX for
the physical fulfilment of such contracts, it would be a significant contribution to liquidity at the local PX. It would
not have to imply different prices for the electricity – a long-term contract could determine the price regardless
what short-term prices are realised on the PX. The public supply concerns approximately 50 percent of
domestic demand.
These are all relatively simple and low-cost measures, not directly intervening with the preferred contract strategies of
the incumbents, but still quite powerful.6 They require a reasonable level of consensus and coordination among
regulators and lawmakers. Implementation and monitoring costs associated with these measures are relatively low. All
four measures can potentially be implemented independently. The proposed measures no. 2 and 4 imply obligations to
purchase energy at a power exchange. This will not increase energy costs unless producers fail to optimise their power
plants. In addition, an obligation to ensure all cross-border trade has to pass through the PX means that there is always
an import-based opportunity at the PX.
Two types of impacts are expected. First, these measures can quickly ensure a turnover at the power exchange
approximately at the same level as the domestic consumption. This increases the probability for new entrants that they
can always buy or sell at a BiH PX unless they require unrealistic prices. Ensuring new entrants have fair options is
important to attract new investments in renewable power generation.
The second result is the indirect effect of improved short-term trading opportunities, particularly for generators, with
lower transaction costs, more price transparency and better overview of alternative trading and generation opportunities.
With a liquid PX with sufficient turnover, both buyers and sellers will gradually have better options to optimise power
plant production and consumption separate from their long-term contracts. The current indications of inefficient dispatch
will be more visible to the owners, and at the same time, the opportunities to improve will be clearer and more available.
Over time, this will also contribute to reducing the barriers to entry for investors in e.g. renewable energy, as the
potential costs due to intermittency and forecasting errors will be more transparent.
Due to the expected benefits of such ‘light’ measures, we do not see the need to recommend any of the ‘traditional’ and
heavy-handed regulatory measures, such as virtual power plants, direct trading obligations, regulated access to
incumbents’ resources, self-supply restrictions and termination of bulk supply contracts, often used in deregulation (or
re-regulation) of electricity markets.7
The table on the next two pages provides an overview and summary of the evaluation of all the considered measure.
6 The explanation behind this is that for all the four measures, the requirements do not preclude the use of long-term contracts to determine the price level.
Hence, if the network operator or the public supplier prefer e.g. a one-year contract with a fixed price, they can still comply with the requirement to purchase
physically the energy on the PX. The long-term contract would then be used as a contract for difference, such that the buyer (seller) would have to pay the
difference to the seller (buyer) if the PX price for any given hour is below (above) the agreed contract price. Hence, both parties could have the same resulting
electricity price as if they did not have to use the PX at all. See also section 7.2.2
7 See also Policy guidelines on increasing competition and liquidity of wholesale electricity markets, including power exchanges (Energy Community Secretariat,
2019).

Category/measure What is it? Recommendation Complexity Affected entities Regulatory Impact on
involvement liquidity
Power exchange (PX)
• Establish a BiH PX A PX for BiH trade only Recommended, as soon as Moderate All market participants Low Very significant
possible
• Regulated PX fee Regulatory approval of PX fees (for Not recommended; unnecessary Low All market participants Low Low
structure market participants)
• Socialisation of PX costs Subsidised PX Not recommended; unnecessary Low All market participants Moderate Low
• Forward markets Organised markets for contracts No regulatory action suggested, Moderate All market participants Moderate Low on liquidity,
beyond day-ahead but do not prevent BiH actors from high on
using efficient trading venues competition
Coupling to neighbouring markets
• Import and export zones One-sided effort to ensure cross- Recommended Moderate Market participants Moderate 4-7 TWH PX
border volumes pass through PX involved in export and volume**
import, PX
• FTRs instead of PTRs* Selling transmission rights as FTRs Not prioritised; import/export Moderate Market participants Low 4-7 TWH PX
instead of PTRs zones and market coupling far involved in export and volume**
more important import, TSO
Improve PX liquidity and attractiveness
• Procure grid losses at PX Require that network operators Recommended Low TSO, DSOs Low 1 TWh PX
purchase energy for grid losses at volume
the PX
• CfD instead of traditional Require that contracts for public Recommended Moderate EPs (incumbent Moderate 5-10 TWh PX
contracts supply are CfDs generators) or large volume
producers
• Market maker obligations* Requirement to maintain (narrow) Not recommended; but voluntary Moderate EPs (incumbent Moderate Moderate
bid-ask spreads market maker agreements is generators/public
encouraged suppliers)
• Reduce admin barriers Ensure licensing and tax routines Recommended Moderate Regulators, all market Significant Low
are as lean and harmonised with participants
that of the EU as possible
• Standardised contracts Standardised contract for bilateral Recommended Moderate All market participants Low Moderate
trade
• Obligation to offer or trade Requirement to offer certain Not recommended; unnecessary Significant EPs (incumbent Significant Moderate to
at PX* volumes at certain prices and inefficient generators) or large high
producers
210915 Liquidity study - draft

Category/measure What is it? Recommendation Complexity Affected entities Regulatory Impact on
involvement liquidity
Improve PX liquidity and mitigate market power
• Non-discrimination Requirement to incumbents to offer Not prioritised – better to reform Low EPs (incumbent suppliers) Moderate Low
obligations* externally on similar conditions as the public supply arrangements
internal contracts directly
• Self-supply restrictions* Limiting the volume of internal Not prioritised – better to reform Moderate EPs (incumbent suppliers) Moderate Low on liquidity,
contracts within the EPs the public supply arrangements high on
directly competition
• Virtual power plants* Obligations to offer VPP contracts Not recommended, market power Significant EPs (incumbent Significant Low on liquidity,
to new entrants and small actors is not a major concern generators) or large high on
producers competition
• Direct trading obligations* Obligations to offer contracts to new Not recommended, market power Significant EPs (incumbent Significant Low on liquidity,
entrants and small actors is not a major concern generators) high on
competition
• Regulated access* Regulated access to generation Not recommended, not clear there Significant EPs (incumbent Significant Low on liquidity,
resources controlled by are such resources and that generators) high on
incumbent(s) market power is a major concern competition
• Termination of bulk supply Ending internal contracts within the Not prioritised – better to reform Significant EPs (incumbent Significant Low on liquidity,
contracts* EPs the public supply arrangements generators/public high on
directly suppliers) competition
210915 Liquidity study - draft

2 INTRODUCTION
This project was commissioned by the World Bank Group and aims to examine liquidity of the electricity market and
suggest measures to improve transparency and competition. The information used in the project was gathered from
market participants and other stakeholders via interviews, numerical analyses by DNV and previous literature.
Bosnia and Herzegovina (BiH) is a signatory party to the Energy Community Treaty of South-East Europe (SEE), signed
for the purpose of liberalization and creation of single electricity and gas market in SEE. BiH is pursuing a
comprehensive reform program in the energy sector in line with its international obligations stemming from the Energy
Community Treaty and EU integration agenda. In 2014, the six Contracting Parties of the Energy Community in
Southeast Europe8 launched the Western Balkan 6 (WB6) Initiative aimed at strengthening regional cooperation and
driving sustainable growth and jobs. Among others, the measures include selection of the appropriate national day-
ahead markets design followed by their integration between WB6 countries, regional coupling of markets, cross-border
balancing cooperation, etc. While coupling of the day-ahead markets of the relatively small and at times illiquid and
incumbent dominated markets is considered to be the best means to bring liquidity into the SEE region and allow for
competitive price formation, there may be other measures to promote liquidity at an early stage of market formation.
The Ministry of Foreign Trade and Economic Relations of the BiH Council of ministers (MOFTER) has requested the
World Bank Group to provide assistance with the implementation of the WB6 initiative roadmap, in particular with
measures aimed at improving transparency and competition. The objective of this study is to assist the MOFTER and
the State Electricity Regulatory Commission (SERC)9, to examine liquidity of the electricity market, which can provide
correct price signals to investors and ensure fair competition for both sellers and buyers.
The project has been informed by direct input from market participants, the state and entity regulators and the ISO via
structured interviews10, by analysis of demand, supply and cross border exchange in the past and simulations of future
power generation and cross-border exchange, and by extensive discussions with the World Bank Task Team.
The report starts out with an overview of the current electricity sector in BiH; the key regulatory principles, the market
participants and their activities, the size of the sector and the organization of wholesale trade and cross-border trade
(chapter 3). Chapter 4 provides a short discussion about the relationship between liquidity and competition, and the role
of liquidity in market design. The key observations about the state of the sector is summarized in chapter 5, while the
numerical analyses are presented in chapter 6. In chapter 7, a long list of potential measures to improve liquidity and
competition are analysed. Chapter 8 provides an overview of power exchanges in the Southeast Europe. Our
conclusions and recommendations are summarised in chapter 8.
8
Albania, Bosnia and Herzegovina, Kosovo, North Macedonia, Montenegro and Serbia
9
As a national regulator in representing the interests of BiH, SERC is responsible for organizing and functioning of the wholesale market, including the
establishment of an institutional framework for an organized day-ahead market, per the Law on Transmission of Electric Power, Regulator and System Operator
of BIH.
10 See Appendix for a copy of the interview guide.

3 OVERVIEW OF THE CURRENT ELECTRICITY SECTOR IN BiH
Bosnia and Herzegovina (BiH) is a country in South and Southeast Europe, bordered by Serbia to the east, Montenegro
to the southeast, and Croatia to the north and southwest, as illustrated in Figure 3-1 below. Administratively, BiH
consists of two entities and one district: the entity of Federation of Bosnia and Herzegovina (FBiH), the entity of
Republika Srpska (RS) and Brčko District (BD). Brčko District is not an entity but has a specific status and is a self-
governing administrative unit.
Figure 3-1 Transmission lines between BiH and neighbours (Source: SERC Annual report 2020)
There is no organised, formal wholesale electricity market in BiH. The Law on the Regulator of Electricity and Natural
Gas, Transmission and Electricity Market in Bosnia and Herzegovina has not yet been adopted. The proposed text of
the Law provides for the establishment of an organised market. In the sections below, we provide the minimum
information necessary to understand the current functioning of the electricity sector and the context and background for
our proposals presented in subsequent chapters.
3.1 Regulators and key regulatory principles

The legal and regulatory authority framework in BIH electricity sector is complex. At the state level, there are three main
laws governing the electricity sector, all adopted in 2004:
• Law on Transmission, Regulator and Electricity System Operator,
• Law on Establishment of Transmission Company and
• Law on Establishment of the Independent System Operator,

A new Law covering the gas and electricity sector is drafted, but consensus over this act could not yet be reached.
The key institutions at the BiH state level are the Ministry of Foreign Trade and Economic Relations (MOFTER), the
State Energy Regulatory Authority (SERC), the Transmission Company (Elektroprenos BiH) and the Independent
System Operator BiH (NOSBiH).
The electricity sector of BiH is subject to both state and entity laws and regulations. Thus, there are three regulatory
commissions:
• SERC, the State Electricity Regulatory Commission,
• FERK, the Energy Regulatory Commission in the Federation of Bosnia and Herzegovina, and
• RERS, the Republika Srpska Energy Regulatory Commission.
SERC is an independent institution of Bosnia and Herzegovina, which acts in accordance with the principles of
objectivity, transparency and equality, and has jurisdiction over and responsibility for transmission of electricity,
transmission system operation and international trade in electricity. SERC was established by the Parliamentary
Assembly of Bosnia and Herzegovina by adoption of the Law on Transmission of Electric Power, Regulator and System
Operator of BIH, and appointment of the Members of the Commission.
Electricity generation, distribution system operation and supply of electricity outside of the Brčko District are
governed by the legislation of two entities, FBiH and RS, and the corresponding regulatory commissions FERK and
RERS. Generation, distribution and supply of electricity for customers in Brčko District is under the jurisdiction of SERC.
See also the Appendix for a list of the tasks and competences for FERK and RERS.
A central requirement for producers, traders and suppliers to use the network is that they are licensed by the regulatory
commission. The licensing systems in all three regulatory commissions are based on licensing laws and regulations that
ensure transparency, publicity and a fair process in the licensing process. Licenses issued by any regulatory
commission in BiH are valid throughout the country.
In FBiH, FERK determines the methodology for establishing the prices of public supply and universal service (see
below). Generation tariffs are technically not regulated in FBiH, and their levels are set by the generation owners
themselves, unless they are procured under feed-in tariffs. A new law in RS (already in force) prescribes the same as in
FBiH, however with a gradual deregulation of the purchase of electricity for universal services (25 percent will be market
based by 2023, increasing to 50 percent in 2024, etc.). Otherwise, generation owners set their own tariffs themselves
also in RS.
The common characteristics of the legislation in BiH, regardless of which entity they refer to, are to define customer
protection in a similar way. This protection is reflected in the provision of the public supply system, universal service and
supplier of last resort. The customer protection system includes obligations related to the existence of a standard
contract, customer information, dispute resolution and compensation, information on price changes, customer protection
in remote areas and protection against disconnection from the network.
According to the current legislation, the public supplier has the obligation to supply the eligible customer in the manner
and under the conditions prescribed by the regulatory commission when the customer does not choose his supplier on
the electricity market.
The public supplier has an obligation to provide a universal supply service to all electricity customers in the three
categories households, small businesses and commercial customers. In doing so, the universal service is part of a
public service that guarantees connection and supply at reasonable, simple and easily comparable and transparent
prices. Customers connected at medium- or high-voltage distribution or above (i.e. above 0.4 kV) are not eligible to
benefit from this arrangement.

Public suppliers are appointed by the entity governments, namely: EP BiH, EP HZHB and ERS, each in its own
geographical area.
Security of supply for eligible customers is ensured by the establishment of a supplier of last resort who has the
obligation to supply electricity to eligible customers if/when the selected supplier ceases to supply eligible customers
with electricity for various reasons (bankruptcy, cessation of supply, inability to find a new supplier). A qualified customer
is entitled to a supplier of last resort for a limited period of time (no longer than 60 days).
Suppliers of last resort are appointed by the entity governments and are the same suppliers as for public supply.
See also the Appendix for a condensed overview of the competences for FERK and RERS.
3.2 Electricity producers and suppliers

There are three relatively large power companies operating in BiH dealing with the production, distribution and supply
(sales) of electricity. Two of them, Elektroprivreda Bosne i Hercegovine (EP BiH) and Elektroprivreda Hrvatske
Zajednice Herceg Bosne (EP HZHB) are vertically integrated companies, owned by the Federation of Bosnia and
Herzegovina (90 percent) and minority shareholders. The third, Elektroprivreda Republike Srpske (ERS) is a mixed
holding company consisting of five companies for electricity production and five companies for distribution and supply,
as well as Electric Power Research and Development Center IRCE a.d. which deals with research, testing and
development of power equipment. ERS as a parent company is fully owned by Republika Srpska.11 EP BiH and ERS
have majority shareholdings in almost all local coal mines which they primarily use for their own coal generating
stations.
In addition to these three, JKP Brčko District operates on the territory of the Brčko District, within which there is also an
organizational unit for distribution and supply of electricity.
Table 3-1 Production portfolio for each of three EPs, TPP Stanari and WF Jelovača12 in 2019 (without small and
industrial power plants)
Company Production (GWh) Installed capacities (MW)
Thermal Renewable Total % Thermal Renewable Total
EP BiH 4 527 1 444 5 971 39 1 181 523* 1 704
ERS 3 017 1 605 4 622 30 600 722 1 322
EP HZHB 2 573 2 573 17 903 903
TPP Stanari 2 068 2 068 13 300 300
WPP Jelovača 88** 88 32 32
Total 9 613 5 710 15 323 100 2 081 2 180 4 261
% 63 37 100 49 51 100
* In 2021, the 48 MW WPP Podveležje started operating

** In 2020, WPP Jelovača produced 114.31 GWh
11 The capital structure of the subsidiaries of MH ERS is 65% participation of the Parent Company, 20% vouchers, 10% PIO and 5% restitution. The capital
structure of IRCE is: 14% state capital, 51% participation of the Parent Company, 20% vouchers, 10% PIO and 5% restitution. The capital structure of the
Parent Company MH ERS is 100% owned by the state (cf. https://ers.ba/istorijat-latin/#pll_switcher).
12 SERC Annual report for 2020, December 2020

Private investors own a number of small hydroelectric power stations and a few photovoltaic units. 13 The largest
independent electricity producers are the Stanari thermal power plant (TE Stanari), a 300 MW coal fired plant owned by
the Energy Financing Team Group (EFT), and Jelovača wind farm (VE Jelovača), owned and operated by F.L. Wind14.
Among the six countries that are known as the WB6 – the Western Balkan parties to the Energy Community Treaty;
Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia – the market concentration is
nominally by far the lowest in BiH. In the five other countries, the market share of the three largest retail suppliers is
equal to or close to 100 percent, while in BiH the corresponding figure is approximately 85 percent. Similarly, the largest
producer in BiH has 40 percent of the total generation and 27 percent of the installed capacity in BiH15, while in the other
five countries the largest producer has a market share between 70 and 98 percent (Energy Community Secretariat,
2020). The potential for competition among domestic generators is thus quite different in these countries.
3.3 Electricity consumption and supply

In 2020, the total gross electricity consumption was 11.3 TWh. Transmission and distribution network losses, self-
consumption and pumping by generators amounted to 1.3 TWh, such that the net consumption was 10.0 TWh. This is
down from 10.9 TWh in 2019. The reduction is mostly due to the closure of the aluminium smelter, Aluminij d.d. Mostar,
and difficulties faced by other large consumers affected by the COVID-19 impact on global metal markets.
Figure 3-2 illustrates how the net consumption is split between different types of customers and between different types
of prices. In 2020, the household demand was equal to 48 percent of total consumption, customers at transmission or
medium voltage distribution network (‘industrial’) 32 percent and other consumers (commercial and other customers at
low-voltage (0.4 kV) distribution network) 19 percent. In 2020, the total number of customers was 1,588,773. Of these,
the non-residential customers were 134,629 and they consumed 5.2 TWh, while the households, 1,451,144, used 4.8
TWh. 91 percent of the total consumption is consumed at the distribution voltage level.16
From January 1, 2015, all electricity customers can choose a supplier. For customers who do not opt for a retail market
supplier, it remains possible to be supplied by a public supplier at public supply prices. Households and other "small"
customers can be supplied through the universal service system (cf. section 3.1). Most customers use this opportunity,
and as indicated in Figure 3-2, their consumption is approximately 65 percent of the total demand.
In 2020, 3.4 TWh were delivered to customers whose prices are not regulated, which makes up 34 percent of the total
energy consumed (the bright green part of the bar at the right hand side of Figure 3-2). The suppliers are primarily the
EPs.
13 https://cms.law/en/int/expert-guides/cms-expert-guide-to-electricity/bosnia-and-herzegovina
14 EP HZHB is balance responsible party for F.L. Wind.
15 The incumbent producers deliver and sell large volumes to suppliers affiliated with the production companies. Hence, parts of each producer’s production
capabilities are committed to such suppliers. If we measure only the uncommitted production, the largest ‘net producer’ is TPP Stanari with a share of 35% of
the ‘uncommitted’ market. The corresponding figures for the incumbent varies between 6% and 29% for 2019 and 2020.
16 All numbers based on SERC Annual Report 2020, Section 3.7.

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Type of customer Prices
Households Industrial Other Regulated Market-based
Figure 3-2 Total consumption per category (2020)17
Although the retail market is open to all customers, the competitiveness of this market is very low. Only 17 customers
had other suppliers than the incumbent in 2020. Their consumption was 158 GWh.18 Only 2 of those 17 are low-voltage
customers. A key reason for this is that the public supply prices, at which incumbents sell electricity to all low-voltage
customers, are significantly lower than the prices that would have been formed by purchasing in regional markets or by
importing from neighbouring countries.
The average price of electricity for customers from the category of households and "other consumption" excluding VAT
and network fees in 2019 was 3.9 Eurocents/kWh.19 The average price on the Hungarian power exchange, HUPX,
which is considered as the most relevant proxy for wholesale prices in the region, was approximately 5 Eurocents/kWh.
As a result, competition from independent suppliers, who have to procure electricity in the wholesale market, is very
small. Another important explanation is significant cross subsidies between different categories of customers where the
category of “small commercial customers” subsidises customers from the household category. This type of subsidy
amounts to 29 percent higher prices for the commercial customers than for households on average, both types of
customers connected at the same low-voltage distribution network level.20
Studies that have analysed the prices of electricity production in BiH and the region have determined that there are
subsidies in the generation sector, such that the EPs sell below what would have been a market value and/or so that
these subsidies reduce the cost of electricity production for the EPs21. According to an Energy Community report,
average prices to both households and non-households are below different estimates of the full costs: “Comparing the
average annual amount of identified subsidies with the average annual coal-fired electricity generation in BiH each MWh
of electricity generated from coal received an average subsidy of EUR 2,10.” (Miljević, 2020). However, while this
estimate is disputed, we can observe that international suppliers or traders do have challenges setting up supply
business or other services to BiH customers.
17 Based on SERC Annual report 2020, section 3.7.

18 SERC Annual report 2020, Annex D.
19 DNV calculations based on annual reports from SERC and the two largest EPs; The price for 2020 is approximately the same.
20 SERC Annual report for 2020, section 3.7.
21 Typically, in the form of voided emissions costs and/or low required return on equity.

3.4 Network and system operation
Operation and ownership of the BiH electricity transmission network is split between the Independent System Operator
BiH (NOSBiH22), which manages the electricity system, and the owner, Elektroprenos BiH23, which is responsible for the
operation and maintenance of the high-voltage network.
NOSBiH is a non-profit company owned by the two entities, the Federation of BiH and Republika Srpska. It carries out
its activities in the territory of entire BiH. The work of NOSBiH is regulated by the State Electricity Regulatory
Commission (SERC). The main roles and responsibilities of NOSBiH are:
• Managing the work of all high voltage transmission facilities at voltage level of 110 kV or above,
• Coordinating with neighbouring TSOs about cross-border flows as well as system operation (see also section
3.5),
• Managing the balancing energy market (see also section 3.7),
• Determination of Indicative Generation Development Plan; review, approve and revise the Long-term
Transmission System Development Plan.
Elektroprenos BiH is a profit company established and owned by the Federation of Bosnia and Herzegovina and
Republika Srpska. It owns the transmission network and is responsible for transmission of electricity, and maintenance,
construction and development of the transmission network. The activities of the company are regulated by the State
Electricity Regulatory Commission (SERC).
The network connection of e.g. power plants is governed by the Network Code and is issued by Elektroprenos based on
the connection study. The content of the study is defined by NOSBiH in consultation with Elektroprenos. NOSBiH has
the authority to review and approve the study, and eventually gives consent for the commissioning of the HV plant and
connection.
3.5 The balancing mechanism

According to the Law Establishing an Independent System Operator in BiH, NOSBiH is responsible for managing the
Balancing Market in BiH. The balancing market is the central market for the purchase and sale of electricity for
maintaining the continuous balance of supply and demand in real-time. Closely related to this is the ancillary services
NOSBiH procures from essentially the same market participants, ensuring the provision of system services. Ancillary
services procured are secondary and tertiary reserves. 24
Participation in the Balancing Market is governed by the agreement concluded between NOSBiH and the electricity
market participant in line with the Market Rules. The main domestic providers of secondary and tertiary regulation
services are the three main incumbent companies.
Activities in the Balancing Market (delivery of bids, activation and settlement) are performed on the Balancing platform.
In accordance with the signed agreements for cross-border cooperation, offers of ancillary services are regularly
exchanged with Elektromreža Srbija (EMS, TSO in Serbia), ELES (TSO in Slovenia, previously named Elektro-
Slovenija, d.o.o.), Hrvatski operator prijenosnog sustava d.o.o. (HOPS, TSO in Croatia and Crnogorski elektroprenosni
sistem AD (CGES, TSO in Montenegro).
22 NOSBiH is the company, performing the role of an independent system operator in BiH, often referred to as the ISO BiH.
23 Ownership to the grid company is split between the entities; the Federation of Bosnia and Herzegovina 58.90%, the Republic of Srpska 41.10%
24 The balancing market and the ancillary services market are two separate markets operated by NOSBiH. For ancillary services, provision of primary regulation
(FCR) is not remunerated, whilst provision of secondary (aFRR) and tertiary (mFRR) regulation is done through public purchase procedures. Transmission
losses and energy for Unintentional Deviations are also procured by NOSBiH using public procurement procedures. Voltage (Q-V) support is a mandatory
service provided free of charge by generators.

According to NOSBiH25, the nominated quantities of tertiary regulation were lower than required in 2020. The lack of
tertiary regulation can be compensated from the block Slovenia-Croatia-Bosnia and Herzegovina and by operators from
Montenegro and Serbia on the basis of signed agreements.
Average imbalance prices for 2020 amounted to 54.15 Eur/MWh, for the realized deficit and 17.26 Eur/MWh, for the
realized surplus of electricity.
For the needs of balancing the power system of BiH in 2020, 32,426 MWh of balancing energy upwards (injected
electricity) were engaged at an average price of 55.27 Eur/MWh26. The engaged balancing energy downwards (taking
electricity from the system) in 2020 amounted to 57,049 MWh. The average price of this energy was 25.66 Eur/MWh,
taking into account offers with negative prices.
Based on the provision of ancillary services of tertiary and secondary regulation during 2020, the providers invoiced
NOSBiH a total of 8,211,475 Eur.
3.6 Cross-border trade and cooperation

The Regional Security Coordination Center (RSCC) and the Coordinated Auction Office for South Eastern Europe (SEE
CAO) have important roles in the functioning of NOSBiH. RSCC performs network model analysis, power system
security calculations and other services for NOSBiH (and other TSOs/ISOs).
SEE CAO performs in its own name but on behalf of and for the account of Participating TSOs explicit allocation of
physical transmission rights on the (bidding zone) borders between Participating TSOs (including NOSBiH) in
accordance with the Harmonized Allocation Rules for SEE CAO. Allocation is performed in explicit net transmission
capacity (NTC) based auctions on both long term and short-term timeframes – yearly, monthly, and daily.
For BiH, the borders coordinated by SEE CAO in annual, monthly and daily auctions are:
• Montenegro – Bosnia and Herzegovina
• Croatia – Bosnia and Herzegovina
Between Croatia and BiH, Croatian utility HOPS organises intraday capacity allocation.
For the border between Serbia and BiH, the short-term allocation (day-ahead and intraday) is arranged by NOSBiH,
while monthly and annual auctions are organised by EMS (transmission system operator of Serbia)
In the process of drafting daily schedules, NOSBiH collects daily plans of market participants, harmonizes cross-border
exchanges with neighbouring operators and prepares aggregate daily schedules. This process takes place in
accordance with the Market Rules.
NOSBiH participates in the IGCC mechanism (International Grid Control Cooperation) for optimisation of procurement
and activation of secondary reserves. NOSBiH also follows other initiatives such as TERRE (Trans European
Replacement Reserves Exchange) and MARI (Manually Activated Reserves Initiative).
3.7 Wholesale trade, foreign market participants and neighbouring markets

The sections above describe production and consumption within BiH, and the roles of the different actors. Unlike
production, distribution and sales, wholesale trade is not an objective in itself for power producers like the EPs, or for
25 SERC Annual report for 2020, December 2020

26 Annual Report for 2020-ISO BiH March 2021. While the imbalance prices are used for settling market participants' deficits and surpluses, the prices for upward
and downward regulation are the prices used when NOSBiH asks entities to increase or decrease production.

suppliers to final customers. Wholesale trade for these actors is rather the result of differences between delivery
obligations towards customers and internal options to source these deliveries, and differences between opportunities for
power generation and opportunities to sell to other actors, within or outside BiH.
Currently, one of the major differences between BiH and neighbouring markets as well as the EU markets, is the
absence of an organised and formalised wholesale electricity market in BiH. When suppliers and EPs have or see
trading opportunities, they cannot immediately turn to a local wholesale market and buy or sell the volume they have in
mind. Instead, they revert to public procurement or tendering processes, for long term trading (from one month and up to
one year) or ad hoc searches for counterparts for short term trading, both in line with the public procurement rules. The
transactions resulting from this are what actually constitutes the current wholesale market in BiH.
The potential counterparts can be domestic players, like other EPs or independent suppliers, regional players with or
without own generation assets, as well as genuine trading companies. The genuine trading companies generally
contribute to efficient utilisation of cross border capacities, by buying electricity wherever they find attractive prices, and
sell in other markets – typically neighbouring power exchanges. Such trading companies often also offer portfolio
management services to independent owners of power plants, including daily scheduling, utilisation of cross-border
opportunities, etc., however, not (yet) in BiH.
Wholesale market transactions in BiH are thus mostly bilateral contracts between such parties, or a transaction where a
licensed actor within BiH buys or sells at a foreign power exchange. While transaction volumes normally can be
monitored by NOSBiH and reported to SERC, because transactions typically result in cross-border flows and/or are
notified to NOSBiH for the purpose of final settlement of imbalances, prices are generally less transparent as the
regulatory commissions only publish weighted prices (as basis for feed-in tariffs).
There is a very small number of independent suppliers who supplied electricity to customers in BiH in 2020. There are
only three suppliers operating not only in BiH but also in the regional market 27 and these are HEP Energija d.o.o.
Mostar, Petrol BH Oil Company d.o.o. Sarajevo and Energy Financing Team d.o.o. Bileća. Together, they delivered 62
GWh to customers in the distribution network, corresponding to a market share of 0,6 percent. Twice as much, 113
GWh, was delivered on the transmission network from suppliers who are not incumbents in their geographical area.
These quantities were supplied by both local and regional suppliers.
A significant amount of energy, 4.7 TWh, was traded bilaterally. Cross-border export transactions amounted to 5.5 TWh
and import transactions to 1.5 TWh.28 17 traders participated in this trade, which essentially is between BiH producers
on the one side, and regional (i.e. other Balkan countries) or international companies (headquartered outside the Balkan
region) on the other hand. The most active buyers in this wholesale market were GEN-I, Axpo BH, EFT, HSE BH, Alpiq
Energija BH and Petrol BiH Oil Company.29 Other foreign market participants are Danske Commodities.
27 ibid.
28 ibid.
29 The full list of wholesale market participants is available here: https://www.nosbih.ba/files/2021/01/20210112-lat-Registar-trzisnih-ucesnika-registrovanih-kod-
NOSBiH-a.pdf

4 THE IMPORTANCE OF LIQUID COMPETITIVE MARKETS
Liquidity can be defined as the degree to which an asset, e.g. an electricity contract or a volume of electricity, can be
bought and sold in the market without affecting the price of the asset and without incurring significant transaction costs.
In a liquid market, the prices are not affected significantly by an additional trade. Liquidity thus describes trading activity.
There is, however, no simple and precise metric to measure liquidity. Instead, different metrics are normally used to
describe the liquidity of a market, such as
• the volume of traded energy,
• the number of deals,
• the churn rate (in electricity markets measured as the ratio of the total traded volume during a period over the
energy consumed during the same period),
• the bid-ask spread30, and
• the market depth (how many orders are ‘waiting’ behind the best bids and asks).
Liquidity tends to evolve over time, such that liquid markets attract more trade and grow liquidity further (increasing
traded volume, reduced bid-ask spread, etc), while less liquid markets risk a “vicious circle” of reduced liquidity over
time. The current liquidity of a market is thus to some extent a result of previous liquidity and expected future liquidity.
The liquidity metrics in total31 gives a picture of what’s actually happening in the market in terms of trading activity.
Competition describes price formation and the interactions between buyers and sellers. A (perfectly) competitive
market has a large number of buyers and a large number of sellers, such that no single buyer or seller is able to
influence the price or any other aspect of the market -- no one has any market control. A competitive market achieves
efficiency in the use of scarce resources if there are no market failures present. In a competitive electricity market,
market participants can expect that prices reflect the balance between supply and demand, and more precisely the
costs of supplying and the willingness to pay for deliveries, as well as the potential for and costs related to import and
export. The competition will then help ensure that production units with the lowest marginal costs of production are
dispatched before the more expensive units (efficient dispatch), and that only so much is produced that consumers are
willing to pay for.
Few, if any, markets are perfectly competitive. To measure ‘how perfect’ the competition in a specific market actually is,
we would ideally need full insight in production costs and willingness to pay and take into consideration import and
export opportunities. In the absence of ‘perfect’ knowledge about this, common metrics of competition focus on
parameters and data that are better available, such as market shares of suppliers to calculate HHI (Herfindahl –
Hirschman Index), or specifically in the electricity market; indexes like RSI (residual supplier index), or more advanced
analyses like comparing actual dispatch with an idealised situation (see section 6).
Both liquidity and competition apply to all timeframes; forward/long-term, day-ahead/short-term, and real-time and
balancing markets. However, assessments of competition and market efficiency tend to focus on short-term markets,
such as day-ahead and intraday, while liquidity analyses are more frequently associated with forward markets also.
There are two simple reasons for this difference:
30 The bid-ask spread is a term from forward markets, measuring the current difference between the best sales offer (ask) and the best purchase bid. The bid-ask
spread in a forward contract with high liquidity should be fairly small. A small spread implies that there is a common view of the “correct” price. A high level of
trading activity does not only reduce the bid-ask spread but also the risk for larger price movements when larger trades are done. A narrow bid-ask spread is
thus an indicator of high liquidity. A narrow bid-ask spread also means better price transparency and less doubt about the “correct” market price.
31 “A holistic analysis of […(various indicators)] shall be carried out in order to conclude whether a BZ reconfiguration is likely to result in increased/reduced
hedging opportunities” (ACER Decision on the methodology and assumptions that are to be used in the bidding zone review process and for the alternative
bidding zone configurations to be considered: Annex I)

1. The aim of competition policies in the electricity sector is typically to contribute to more efficient dispatch and
cross-border trade, hence the short-term focus.
2. The traded volumes in a market consist of trade in the day-ahead and intraday market in addition to forward
markets. While it is not possible for the turnover in short-term markets to be more than 100 percent of the total
production or demand (for day-ahead and intraday separately), the volume traded in forward markets can be
any multiple of the physical volume. The most liquid power markets have a total trade at least ten times as
large as the physical consumption.
Key measures in competition policies are often (but not always) directed towards the short-term markets, and in
particular day-ahead and intraday markets. Short-term efficiency and liquidity are necessary conditions for long-term
efficiency and competitiveness. Improved dispatch and cross-border trade, and improved short-term liquidity, has a
positive impact on price transparency and discovery, reducing the market uncertainty about valuation, with a positive
impact on long-term liquidity also.
It should be noted that there is a strong relationship between liquidity and competition, but that relationship is quite
nuanced. For instance, one might ask, what comes first, liquidity or competition? To answer that question, let’s look at
both sides. A certain degree of competition (e.g. in sufficient number of sellers and buyers) is conceivable even with
poor liquidity (e.g. lack of sufficient product trading in the open market). In contrast, high liquidity (an attribute of trading)
is meaningless without sufficient competition (participants to engage in the said trading activity). Liquidity is thus more of
an indicator of competition than a prerequisite for competition.
Measures that successfully increase liquidity do not automatically improve competition but may, in the long term, reduce
barriers to entry for new participants as well as barriers to capacity expansion for all participants. Liquid forward, day-
ahead and intraday markets allow buyers and sellers to trade electricity in a timely manner at a reliable market price.
Market participants can pursue risk management strategies effectively. There is a lower risk of mistrust in the market.
The more liquid the markets are, the easier it is for non-vertically integrated firms to compete with vertically integrated
firms and for new entrants to compete with incumbent firms. Insufficient competition will materialise as inefficient short-
term decisions (dispatch and trade), and in the longer term potentially also as insufficient or inefficient investments.
Common measures from competition policy thus tend to focus on containing structural market power (e.g. through
antitrust policies) and on incentives to efficient short-term behaviour in terms of dispatch and trade.
Low liquidity causes an information asymmetry between incumbents and new entrants, making it more difficult for new
entrants to manage their economic risks related to assets or to supply for retail customers by hedging (buying and
selling electricity in the wholesale market).
Poor liquidity in day-ahead and intraday markets may result in mistrust in organised forward markets and may
encourage business models that reduce the need to trade in organised markets (i.e. vertical integration or continued
reliance on bilateral contracts). Illiquid short-term markets complicate short-term resource optimisation, efficient dispatch
and risk management for actors without large portfolios of power plants and/or sales to various end-users. Similarly, an
independent retailer can hardly exist without at least some liquidity in short-term markets. Poor liquidity may also result
in a less efficient price formation and a shakier basis for investment decisions. Low levels of liquidity can increase
market risk for new entrants as it becomes more difficult to hedge and to respond to changes in market conditions. This
barrier limits the competitive pressure on incumbent firms. Hence, to improve market efficiency and performance, it is
natural to focus on efficient venues to trade, incentives to use such venues and how to reduce transaction costs and
time. Improving liquidity in the BiH electricity market thus requires attention to competition in the short-term markets.

5 KEY OBSERVATIONS IN BIH
Our analysis of the electricity market in Bosnia and Herzegovina has three types of sources. First, there are already
several relevant and good analyses of this market available in the public domain, several of these from the Energy
Community Secretariat. Next, we have interviewed 14 stakeholders – regulators, domestic, regional and international
market participants, as well as the ISO. Finally, based on data collected during this project and DNV’s own information
about BiH, we have performed some quantitative analyses of the market.
Chapter 3 presents a snapshot of the institutional and structural elements of the market. In this chapter we extend the
picture by adding the views of stakeholders and insights from the quantitative market analysis.
5.1 Organised markets

At present, there are no organised markets within BiH, except for the balancing timeframe and the public procurements
and tenders arranged by the incumbent participants to close gaps in their portfolios by means of new bilateral contracts
with interested and accepted counterparties (see section 3.7). Access to cross-border capacity, which is necessary for
those who want to take power in or out of BiH, e.g. for trade at one of the power exchanges in the neighbouring
countries, is available via the Coordinated Auction Office in South East Europe (SEE CAO) (see section 3.5 for details
about the responsibilities of different parties).
The law on the basis of which an organised electricity market would be established within BiH has been in draft since
2016, but its adoption is still pending. Consequently, the currently limited wholesale trade in BiH is bilateral, it is mostly
not transparent or visible for third parties, and it is not straightforward to execute trades.
The largest market segment is supply of electricity to the public suppliers. This is, however, not organised as a
conventional market, but as internal transactions (transfer pricing) within each vertically integrated group.
Due to the lack of an organised wholesale market within BiH, wholesale transaction costs and time are relatively high in
BiH as compared to other countries where PX trading is feasible. Stakeholders seem to agree that the wholesale market
is not very efficient. The conclusion of long-term contracts (with a duration from one month to one year) is subject to a
tender procedure under the Public Procurement Act. The Public Procurement Agency has the authority to monitor and
ensure that a procurement/sale process is in accordance with the Law. The process typically takes a few days and
includes opening and evaluating bids, as well as the process of harmonizing contract elements with partners. In
contrast, trading of forward contracts at power exchanges in other countries takes a few seconds.
The process for short-term contracts (with a time frame from one hour to one month) is more efficient. Some EPs have
their own developed web applications. In other cases, sales are made at the direct invitation of potential traders who are
on a list of approved and trusted counterparts that have signed General Agreements. Both approaches are in line with
the public procurement policies and acts.
Given the lack of organised, efficient markets, there are limited opportunities for both incumbents and new or
independent actors to reverse or modify the composition of the contract portfolio. While a semi-organised primary
market for wholesale contracts exists, there are limited options for secondary trading.
The wholesale market is not fulfilling its potential role in facilitating optimalisation of the utilisation of production assets or
the network, nor does it provide relevant economic signals about long-term needs and requirements of the system. For
independent developers of e.g. renewable electricity sources, this is a significant barrier to entry – with respect to both
planning of short-term optimisation/utilisation as well as to long-term risk management. Lack of transparency creates

uncertainties for all about the correct, real market value of electricity in all but the balancing timeframes.32 The missing
competition and activity at the retail level does not reduce the problem of price discovery at the wholesale level.
There is hardly any market activity at the retail level (customers connected at 0.4 kV). There is very limited customer
switching and no incentives for customers to opt out of public supply contracts and no incentives for independent
suppliers to compete for retail customers. Prices for final consumption for all but the very largest industrial consumers
are still below prices observed on the organised markets in the region. Retail prices do not fully reflect actual generation
costs within BiH, due to, among other things, political and social factors as well as incomplete unbundling. A separation
of supply from distribution has started but is not yet completed.
While there is no actual domestic competition within BiH, it is a significant scope for potential competition, both at retail
and at wholesale level. The largest EP has approximately 40 percent of the total generation in BiH, while the three of
them together have an aggregated market share of 80 percent. Import capacity is approximately half the size of the
peak load. See Appendix for a brief analysis of the potential for competition.
Interviewees also provided several detailed and important observations, highlighting the scope for improvement:
• The lack of an organised wholesale market is a barrier to connecting RES
o One interviewee from the private sector considering a significant RES investment within BiH struggles
to find counterparts or partners that are able to value the plant within BiH, thus seeking to find ways to
reduce the cross-border price risk to alternatively value the plant against the prices from another
power exchange in the region. This secondary approach would have been less relevant if there
already was a power exchange for short-term price discovery within BiH. This is perceived as a real
barrier and may ultimately delay or stop the project.
o Without transparent wholesale prices, it is complicated to design and implement one of the most
efficient support schemes for renewable electricity; feed-in-premium (FIP) arrangements.
o Without a power exchange and transparent short-term prices, balancing of small RES generators is
complicated and represents a significant risk for independent actors. There seems to be insufficient
confidence in the balancing market and its ability to ensure efficient and cost-effective balancing of
variations in RES output.
• The process of contracting in the wholesale segment, explained in section 3.7, is slow, inefficient, outdated, in-
transparent, and fails to give relevant economic signals to the participants. There seems to be a decreasing
number of participants in the wholesale market; most potential international participants are not comfortable
and/or not seeing sufficient profit opportunities in doing trade within BiH. The key reasons are lack of organised
wholesale markets and relatively few customers to compete for because all low-voltage customers are eligible
to benefit from public supply arrangements.
• There are no opportunities for anonymous trade, which means that a trader risks revealing market views
he/she would not like to share with competitors if asking for a trade. This can potentially be a significant barrier
to trade, and especially for the incumbent participants.
While there are concerns among incumbents as well as foreign existing and potential market participants, there are also
positive signs and indications of a development in the desired direction.
• Some interviewees expect that the prescribed obligation to procure electricity for public supply on market
principles and the process of unbundling of distribution and supply, which is not yet finalised, as well as the
32 And, as we will explain below, there is at least some doubt about the correctness of the imbalance prices as well.

planned introduction of new more advanced incentive schemes for RES, will positively increase
competitiveness.
• Vertically integrated utilities have yet to be separated, which will contribute to market development, as will the
obligation to market electricity for public supply.
o Distribution system operators in the Federation of BiH are still not unbundled (separated) from
production and supply, although this is required by the Law. The Law envisions the adoption of a
program to restructure power companies, which includes the unbundling of distribution system
operators.
o In Republika Srpska (RS), the new electricity Law prescribes the unbundling of distribution system
operators from supply (previously separated from generation). The separation process is expected to
take some time.
• Interviewees mentioned as an interesting opportunity that NOSBiH might use organised markets for
procurement of energy for network losses.
Finally, several stakeholders emphasised that a local power exchange must be fully harmonized with relevant EU
directives and regulations, in order to ensure that it can participate in market coupling arrangements with power
exchanges in the EU and/or allow for smooth cross-border trade.
5.2 Risk management

Market rules introduced in 2016 significantly contributed to the improvement of planning and strengthened responsible
behaviour of market participants. However, with limited opportunities and the relatively high transaction costs, risk
management for the major domestic actors comes down to careful planning of the energy balance across time,
monitoring of hydrology, coal stocks and weather forecasts, the condition of production facilities and the balance
between supply and consumption in the region. In addition, a conservative export plan is made with different time
horizons.
The overall objective seems to be to minimise the risk of inability to produce according to demand from commercial and
retail customers, and to prevent purchasing any ‘missing energy’ in the market. This strategy fits well with the absence
of a local power exchange or other organised short-term markets but is generally too narrow to ensure efficient dispatch
within BiH.
Financial risks are also managed by forward contracting, pursuant to public procurement rules.
5.3 Balancing mechanism and imbalance settlement

The balancing system is based on market principles and is rated as the most advanced in the region. Imbalances are
settled financially. The current level of variable renewable energy (VRE) can be balanced without problems. However,
stakeholders argue that an organised market is considered necessary to integrate larger capacities. In particular, VRE
developers and traders point to the lack of a day-ahead and an intraday market; relying on PXs in adjacent countries is
too complicated.
Furthermore, independent producers are likely to value the presence of a local power exchange to provide further
options for short-term balancing than relying only at the balancing mechanism. The absence of an organised market
results in prices for imbalances not being tied to market prices and this causes uncertainty for independent producers
and suppliers. Currently, they cannot easily estimate the possible future balancing costs.

The owners of small/mini hydropower plants, solar and other renewable energy sources in FBiH as well as in RS have
no obligations for balancing costs.33 Some stakeholders would prefer that producers should be able to choose their
balance responsible party (BRP) and thus regulate their balancing responsibility in the most economical way instead of
mandatory part of the BRP run by the Operator for RES.
Stakeholders underline that current practice shows that certain improvements in balancing system are needed and
possible, such as:
• Regulating VRE balancing: Also, the small VRE producers in FBiH must be introduced into the balancing
system in order to prevent balancing problems in the future when there will be many more than today.
• Inclusion of reactive energy regulation in ancillary services should be considered.
• A limitation of the price of tertiary regulation downwards should be considered. Currently, the lack of a price
limit seems to be an important risk factor for all BRPs.
5.4 Cross border trade

The EU has defined a short-term (2025) target in ensuring the availability of cross-border connections is at least 70
percent of the nominal transmission capacity. Availability of cross-border interconnections contributes to competitive
pressure, helps efficient use of power plants and reduces the potential costs of balancing variable renewable resources.
In line with several of its neighbours as well as numerous EU countries, BiH has a significant challenge in ensuring
efficient availability of cross-border interconnections. For the EU, the status is currently quite far from the target except
for most of the borders with DC (direct current) interconnections. For several of the AC (alternating current)
interconnections, the objective is satisfied in less than 30 percent of the time34. For BiH and the five other countries in
the WB6 group, the availability has been around 30 percent; a bit higher for Serbia and Montenegro, a bit lower for
Kosovo and North Macedonia (Energy Community Secretariat, 2021).
While the availability is essentially determined by TSOs (or ISOs) and how they operate the entire transmission network,
the actual utilisation is ultimately a result of the market participants’ decisions to produce and consume electricity. The
numerical analyses explained in section 6.1 indicate that the actual utilisation is well below the available capacity.
Some interviewees noted the administrative complexities for companies outside BiH to act as counterparts for BiH
companies seeking to buy or sell energy in the wholesale market. The licensing arrangements (see section 3.1) are
recognised as complicated also by SERC, which in 2020 “further simplified and expedited the procedure for granting this
type of licence”35.
VAT reporting and settlement is also considered complicated and apparently relying on paper-based documentation.
VAT reporting and settlement related to cross-border trade with electricity and electricity contracts is also recognised as
a source of concern within the EU. VAT rules have been exploited for fraud, but still, EU governments have succeeded
in adapting reporting and control mechanisms that does not impede each individual contract.
33 In RS, the Law on Renewable Sources exempts renewable sources with installed capacity below 500 kW from balancing costs. Generators with installed
capacity above 500 kW and entitled to incentives and a guaranteed price pay 25 percent of the balancing costs, whereas producers selling their generation on
the market cover the balancing costs themselves. In FbiH, the Law on Renewable Sources, exempts owners of microplants as well as privileged and qualified
generators with installations below 150 kW from balancing costs, while generators larger than 150 kW are fully responsible for balancing costs. However, the
RES Operator has not yet developed a methodology for calculating the imbalances.
34 https://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Publication/MACZT%20report%20-%20S1%202020.pdf
35 SERC Annual report for 2020, December 2020, section 3.3

5.5 Implications of ETS and carbon border adjustment taxes
The BiH electricity sector is not (yet) subject to carbon pricing. Although the Contracting Parties of the Western Balkans
have already committed to 2050 climate neutrality targets by the adoption of the Sofia Declaration, concrete long-term
plans of action are still to be made. A recent study explains that by setting up national or regional carbon pricing
systems compatible with the European Trading Scheme (ETS) for emission quotas, the countries can access
development finance supporting their just transition towards a climate-neutral economy and can potentially also mitigate
the effects of the proposed Carbon Border Adjustment Mechanism (CBAM) (Green Policy Center, 2021). The EU,
launching their “Fit for 55”-program, repeats their ambitions and their plans to introduce a border adjustment tax for
carbon.
EPBiH has revealed plans to introduce internal carbon pricing, and hence increase transparency about what emission
cost they would have had if formally exposed to ETS.36 Thus, one way or the other, carbon pricing is coming closer to
the BiH electricity sector.37 For the last months, ETS prices have increased, and further increase is generally expected
in the market.
The introduction of the ETS mechanism is likely to reduce the production from thermal power plants and similarly,
increase the construction of new production capacities from VREs. In case new capacities are not built, BiH will likely
become a net importer of electricity. All of this points to the need for more efficient and transparent pricing for electricity.
While moving from a net exporter to potentially a net importer situation does not in itself impact the value of efficient
markets and market organisation, an increase in the utilisation of VREs clearly increases the benefits of a power
exchange. The major point is that reduced utilisation of thermal power plants and increase of capacity from renewable
sources significantly changes and increases trading needs and motivations. With more volatile sources of electricity, like
wind, run-of-river hydropower and solar, the portfolio of each producer will be more volatile, increasing the needs of
each participant to balance the portfolio with production from other market participants. Similarly, the supply and
demand balance per country will also be more volatile, increasing the need for cross-border trade as well.
36 https://balkangreenenergynews.com/epbih-to-calculate-co2-costs-internally-after-deal-with-energy-community/.
37 See also https://balkangreenenergynews.com/kopac-coal-plants-in-energy-community-reaping-profits-as-co2-isnt-priced/.

6 POTENTIAL BENEFITS OF A WELL-FUNCTIONING WHOLESALE
MARKET FOR GENERATION DISPATCH AND CROSS-BORDER TRADING
Considering potential measures to further develop an electricity market must be based on economic theory as well as
the facts in terms of market structure, participants, assets, demand, etc. In the previous chapters, we have provided
both. In this chapter, we apply a numerical power market model, DNV’s European power market model based on
Plexos, to further understand the current and potential future performance of the sector.
The chapter has two parts; first, we compare the historic dispatch in BiH with what an optimisation model would have
suggested under comparable conditions. This analysis demonstrates that there is scope for improvement, but it also
demonstrates that the observed production pattern is not dramatically different from what an economic optimisation
model, not constrained by the old habits, high transaction costs, complexities to arrange for export or import, and other
potential sources of inefficiency, would have suggested.
The second part aims to look further into the future and consider how the BiH sector is impacted from increasing costs
of CO2 emissions.
DNV’s Plexos model is a techno-economic optimisation model. This implies that production per hour is based on an
optimisation with an aim to minimise total costs. In practice, this means that plants are dispatched in the model if their
marginal cost of production is equal to or lower than the market price calculated by the model.
For understanding of the results, it is important to recall the nature of these marginal costs. For thermal plants, the
marginal costs are generally determined by the fuel cost, which in turn depends on fuel prices and efficiency rates of the
plants, and costs of emissions. In addition, technical constraints may play a significant role in the estimate of marginal
costs. For wind power and hydropower (without reservoirs), the marginal costs are quite low – typically less than 1
EUR/MWh. Hence, it is not the cost but the access to wind or water that mostly determine the optimal dispatch of such
plants. For hydropower with reservoirs and other forms of storage, the marginal cost is equal to its opportunity cost; the
cost of releasing one unit of energy in period 1 depends on i.a. the expected value in period 2.
6.1 Analysis of historic dispatch

To explore the potential benefits, DNV set up a simplified BiH market model to simulate the optimal generation dispatch,
using the inputs and assumptions summarized in Table 6-138. This market model was used to optimize the operation of
the large lignite-fired units (Gacko, Kakanj, Stanari, Tuzla and Ugljevik), the Capliina pumped-storage plant and, to a
lesser extent, local hydropower power plants against local load, available cross-border capacities and foreign market
prices, as follows:
• Croatia and Serbia were modelled as external markets where (depending on scenario) electricity could be
freely sold or purchased close to the hourly historic market prices. Hourly imports and exports at both borders
were then endogenously optimized together with generation dispatch in BiH.
• Conversely, and for simplicity, as there were no Montenegrin exchange prices available for 2019, exchanges
with Montenegro were always set equal to historic scheduled exchanges.
• The operation of hydropower plants was represented by a single aggregate unit. 50 percent of the historic
hourly generation profiles were enforced as a must-run constraint, to account for run-off-river plants and other
hydrological restrictions. The remaining 50 percent of the original production volumes was re-optimized within
each day, within the capacity limits of the existing hydropower plants in the country.
38 Please note that this exercise required extensive data processing and cleansing, e.g. to deal with missing and/or implausible values.

• Lignite-fired units and the pumped-storage plant were individually optimized against changing market
circumstances. The maximum production by each lignite unit in a given month was furthermore limited
with/without some flexibility (depending on scenario) in accordance with monthly historic values.
o For the base case, each unit was allowed to increase its monthly production by up to 2.5 percent of
the historic volume.39
o This constraint was relaxed to 25 percent and removed in two separate cases.
Table 6-1: Key inputs and approach for fundamental modelling of BiH power market
Category Modelling approach and relevant inputs
Load − Based on historic time series (ENTSO-E transparency portal)
Thermal plants − Based on technical and economic parameters (incl. fuel costs) provided by
NOSBiH and plant operators, complemented by expert assumptions
− Resulting generation costs aims to capture each unit’s marginal cost of
production40
− Non-availability based on ENTSO-E transparency portal
− Limitation of max. production on monthly basis
Pumped-storage plant Capljina − Fully optimized

− Based on information provided by NOS BiH and EPHZHB
Hydropower plants − Based on historic production (ENTSO-E transparency portal),

allowing for partial re-optimization on a weekly basis
Cross-border capacity − Hourly NTC (ENTSO-E transparency portal)
Exchanges with Croatia, Serbia − Optimized or historic scheduled exchanges (ENTSO-E transparency portal)
− Flex. purchases / sales at historic market prices (CROPEX/SEEPX or
HUPX)
Exchanges with Montenegro − Fixed exchanges, based on historic values
To illustrate the quality and limitations of this approach, Figure 6-1 compares the simulated dispatch of the thermal
power plants against the historic observations for the year 2019. Whilst the upper chart is based on historic market
prices in Croatia and Serbia, the lower chart alternatively considers prices at the Hungarian exchange HUPX, which
reportedly is a more important reference for trading in the region. As stated above, the simulated values are based on
the same production profiles as observed in reality, in order to account for hydrological constraints and possible fuel or
other constraints, which may have been faced by thermal power plants. The chart leads to several observations:
• First of all, one can clearly see that the simulated values principally follow the same pattern as historic
dispatch, although the modelling approach would basically have allowed for significant variations. This seems
to indicate that the modelling approach does, despite the underlying simplifications, manage to capture the
principal operating characteristics of the existing power plants.
39 The objective was an hourly optimization. The monthly maximum energy constraint is not a hard constraint for the hourly dispatch. Monthly constraint with a
penalty in the Plexos model gives the model a monthly target which can be violated if the model does not find any solution (which was not the case).
40 Note that this implies that the approach does not consider fixed costs but aims to optimize dispatch such that a maximum contribution to cover fixed costs can
be obtained.

• Secondly, this observation indicates that local producers seem to optimize their trading portfolio and the
dispatch of their power plants against changing market prices already, despite the lack of a local organized
market in BiH41. DNV did not have access to any information that would have allowed to quantify the volume of
trading between each of the three EPs, on the one hand, and the other EPs or other wholesale market
participants, on the other hand, whether locally or abroad. Nevertheless, the principal match between historic
and simulated generation in Figure 6-1 can be interpreted as a clear sign that the three EPs engage into some
form of short-term trading to adjust their contract portfolio to varying market prices.
• Nevertheless, the much higher volatility of the simulated dispatch (blue) also shows that there may still be room
for further improvement, i.e. that the current market setup does not yet allow for full optimization of local
generation dispatch against short-term price variations on e.g. a daily or hourly basis.
• Finally, the second chart shows that the choice of using either adjacent markets or HUPX as price benchmark
has an almost negligible influence on the simulation results. This indicates that the use of HUPX, with its higher
liquidity, may indeed represent a suitable reference for regional trading and that the modelling results are rather
robust against the use of either set of prices.
Figure 6-1: Simulated vs. historic 2019 dispatch of thermal power plants
Source: DNV analysis
41 Overall, the simulated values account for 99% of historic production volumes, i.e. indicating that producers would have sold slightly less than in reality.

As a next step, Figure 6-2 looks at the impact of gradually relaxing the volume constraints on the thermal units. In a first
step, each unit was allowed to increase its production by up to 25 percent of the historic volume per month, whilst all
volume constraints were relaxed in a second step.
Figure 6-2: Simulated vs. historic 2019 dispatch of thermal power plants
Again, these adjustments do not lead to any fundamental changes in terms of total generation, although the chart does
indicate a scope for increasing production (and hence exports). When increasing permitted production by 25 percent,
actual generation grows by about 9 percent. Relaxing all production constraints allows for an additional generation of
less than 1.5 percent.
Re-running the model with different assumptions on CO2 prices gives a different picture; see Figure 6-5. As the two
charts show, an increasing share of historic CO2 prices clearly reduces local generation. Whilst the impact remains more
limited when limiting CO2 prices to 25 percent of those under the ETS, the impact becomes more and more pronounced
when increasing the share to 50 percent or ultimately 100 percent. In the latter case, total annual generation decreases
to about 50 percent of the historic volume, noting that the decrease would be even more pronounced without the must-
run commitments assumed for some units. Conversely, annual generation is still slightly higher than historic generation
when exposing local generators to 25 percent of ETS prices. Simply put, the BiH thermal plants are less competitive the
more they are exposed to CO2 costs.
Not surprisingly, these impacts are even more impressive when looking at generator gross margins. Carbon prices
equal to 25 percent of historic ETS prices reduce generator margins by about 30 percent already. The 50 percent case
leads to a decline of more than 50 percent, whilst application of full ETS prices reduces original gross margins by more
than 95 percent. With an almost total wipe-out of the margins for thermal plants, questions about plant retirement and
scope for renewable energy become imminent.
Whilst it seems reasonable to assume that BiH generators will not be exposed to ETS prices in the next two to three
years, this additional analysis highlights that the corresponding reforms as currently being discussed in the Energy
Community may greatly deteriorate the profitability of thermal generators. Under these circumstances, the benefits of a
more liquid wholesale market and improved market integration as identified above would become even more important.
The societal value of a liquid and well-functioning wholesale market will be even higher than suggested by the short-
term analysis.

Figure 6-3: Impact of CO2 prices on simulated dispatch of thermal generation in BiH
More important is the impact on the total cost of electricity supply. Table 6-2 shows the total variable generation cost
plus the cost of import minus the revenue from export of electricity, for both the base case and some of the alternative
scenarios without thermal generation constraint (indicated in the matrix). For the upper row, the unit costs and all other
assumptions are based on Table 6-1 and the same as used for the illustrations above. For the lower row, the short-term
marginal costs are replaced by numbers from the regulators’ reports; in these scenarios the units are dispatched and
optimized by regulator tariffs, not on heat rates and fuel costs.
It is striking that the estimated efficiency gain is approximately the same regardless how the model simulations are
designed, and what sources and approaches to cost are used. The analysis suggests an efficiency gain in the
magnitude of EUR 60-65 million per annum.42 The total generation varies less than 10 percent between the different
scenarios.
42 For comparison, the total annual turnover for the EPs is in the magnitude of EUR 1 billion, parts of which concerns network costs. The potential efficiency gain
is thus around 10 percent of the energy cost for BiH end-users of electricity.

Table 6-2 Estimated scope for cost reductions
Least-cost dispatch Dispatch optimisation Dispatch optimisation
optimisation, ‘locked’ to with full flexibility of with full flexibility of
historic dispatch and thermal plants, except thermal plants, no must-
cross-border trade must-run constraints on run constraints on
patterns thermal units thermal units
Base case as defined above. Cost reduction EUR 67 Cost reduction EUR 65
Costs based on DNV and Total variable cost = EUR 120 million, corresponding to a 56 million, corresponding to a 54
other sources million percent reduction percent reduction
Alternative base case. Cost reduction EUR 60 Cost reduction EUR 59

Costs based on regulator Total variable cost = EUR 157 million, corresponding to a 38 million, corresponding to a 38
reports million percent reduction percent reduction
Note that this cost estimate only considers marginal (upper row) or variable costs (lower row), and that revenue from
modelled exports as well as costs from modelled imports are included in the numbers. The 40 to 55 percent cost
reduction is thus obviously smaller if compared to the actual total cost of the electricity supply.
Even though the real scope of the corresponding losses may be different in reality, these numbers highlight that the
imperfections of the current wholesale market arrangement, in particular the lack of a liquid market venue seem to
cause significant costs to the sector and ultimately the taxpayers that own the state-owned generators, private owners
and electricity consumers in Bosnia and Herzegovina.
6.2 A closer look at the historic cross-border exchange

In an efficient wholesale market, cross-border exchanges always lead to price convergence in neighbouring markets,
unless they are constrained by congestion, i.e. limited cross-border capacity available to the market. One important
indicator for assessing the efficiency of electricity wholesale markets is the relationship between cross-border flows and
regional price differences. Figure 6-4 shows the utilization of available cross-border capacities between BiH (BA), on the
one hand, and Croatia (HR) and Serbia (RS), on the other hand. More specifically, the chart shows the duration curve of
the corresponding exchanges, i.e. indicating by how many hours in the year scheduled cross-border exchanges used a
given percentage of available net transfer capacity (NTC). Figure 6-4 clearly shows that available cross-border
capacities were almost never fully utilized in the year 2019. But as shown below, a comparison of hourly market prices
at the corresponding power exchanges, i.e. CROPEX in Croatia and SEEPEX in Serbia, reveals that there was scope
for further commercial exchanges at both borders.

Figure 6-4: Use of available cross-border capacity towards Croatia and Serbia, per hour in 2019 (duration curve)
Source: DNV analysis, based on data from ENTSO-E transparency portal
While Figure 6-4 rely on historic data only, Figure 6-5 combines simulation data (prices) and historic cross-border
exchange to analyse the efficiency of cross-border exchanges. These two charts show, separately for both borders,
historic scheduled commercial exchanges on the horizontal axis vs. the simulated price differential between the
corresponding neighbouring market and BiH on the vertical axis. Ideally, if prices were as simulated, or if the historic
observed cross-border flow was according to the simulated flows, all observations should have been in the upper right
or bottom left quadrant, corresponding to buying cheap but selling expensive. Hence, observations in the upper left or
bottom right quadrant indicate an inefficient flow and/or inefficient dispatch – an observed flow against the modelled
price difference – if the simulation was a perfect reflection of the reality.
However, it is unclear to which extent the ‘inefficient’ observations reflect limitations within the current market framework
or are due to simplifications in our simulations, e.g. with regards to costs or lack of knowledge about fuel constraints.
Figure 6-5: Efficiency of historic cross-border exchanges against simulated market price differentials when
using HUPX prices
Assuming the modelled price differences are at least somewhat realistic, these two charts highlight that current market
arrangements do not yet allow for sufficient market integration and an efficient use of available cross-border capacities:

• In an efficient market, market prices should only diverge when cross-border capacities are congested.
Conversely, available cross-border capacities should be fully utilized whenever market prices are different.
• In contrast, the distribution of the observations in Figure 6-5 clearly indicates that this was not the case in
practice, i.e. that there were many cases where available cross-border capacity was not fully used, although
this would have been profitable under the assumed market price differentials.
• Furthermore, cross-border exchanges should always follow the direction of price differences, i.e. positive flows
should only be observed in case of positive price differences, and vice versa.
• In contrast, the two charts in Figure 6-5 show many hours where historic exchanges were against the direction
of the simulated market differences. In these cases, market participants seemed to lose money by transporting
electricity from a market with higher market price to an area with lower prices (assuming the simulated prices
reflect the actual values to the market participants).
Despite the simplifications of the modelling approach, it is worth noting that these observations are by no means
exceptional. Indeed, similar analyses on the efficiency of cross-border trading at several European borders before
implementation of market coupling has led to very similar results.
To quantify the scale and impact of the underlying inefficiencies related to cross-border trade, Table 6-3 summarizes
several indicators, which are based on the same data as also illustrated by Figure 6-5:
• The first two rows show that exports against the simulated price differences occurred in about 1,500 – 2,500 h,
or nearly 25 percent of all hours during the year on average. Conversely, the number of hours with imports of
more expensive electricity were observed in a few hundred hours or 6 percent of the time already. However,
this difference is less relevant when considering that BiH was a net exporter for most of the time in 2019. Also,
it is important that the number of hours with inefficient flow is not a value-based metric. Volume and price
matter more than number of hours.
• The next three rows show the total volume of flows against simulated price differences. In total, such inefficient
exchanges amount to more than 900 GWh, incl. more than 650 GWh of exports and about 250 GWh of
imports. In comparison with total exports and imports of about 3 and 0.85 TWh at these two borders,
respectively, this corresponds to between 22 percent and 30 percent of the overall volumes.
• Finally, these inefficient exchanges also cause economic losses, equivalent to about EUR 15 million per
annum. In relation to a total annual consumption of about 12 TWh, this corresponds to about 1.2 €/MWh.
Table 6-3: Scale and costs of inefficient cross-border exchanges

HUPX prices HR/RS prices
HR RS Aver./Total HR RS Aver./Total
Hours with Export 2,513 1,551 23% 2,605 1,587 24%
inefficient flows Import 468 670 6% 454 639 6%
Volume of inefficient flows Export 459 204 663 475 212 687
(GWh)
Import 73 191 264 73 164 237
Total 532 395 926 548 377 924
Cost of inefficient flows Export 10.3 2.6 13.0 10.1 2.8 12.8
(EUR m)
Import 0.4 1.4 1.8 0.4 1.2 1.7
Total 10.8 4.0 14.8 10.5 4.0 14.5

Even though the real scope of the corresponding losses may be different in reality, these numbers highlight that the
imperfections of the current wholesale market arrangement, in particular the lack of a liquid market venue seem to
cause significant costs to the sector and ultimately the taxpayers and private generation owners in Bosnia and
Herzegovina. Efficiency losses related to sub-optimal cross-border exchange amounts to nearly 15 million Euro,
approximately a quarter of the total efficiency losses reported in chapter 6.1.
6.3 Looking towards 2025 – impact of CO2 prices

The market simulations indicate that, despite these inefficiencies, local producers are still earning substantial gross
margins in the wholesale market, i.e. before consideration of fixed costs and based on the assumed fuel costs.
Nevertheless, it should be noted that these margins are also caused by the fact that electricity producers in the EU are
exposed to carbon prices under the European Emission Trading Scheme (ETS). Consequently, wholesale market prices
account for the costs of CO2, whilst local producers are not yet exposed to these costs. In line with the corresponding
obligations and initiatives within the Energy Community, however, it seems reasonable to assume that local producers
will gradually have to pay for CO2 as well.
As a final part of the analysis, DNV has first re-run the earlier simulations but not restricted thermal generation to
resemble the actual production in 2019. Next, we have run the model for 2025 and considered different scenarios, in
particular for CO2 prices and different assumptions regarding the relevant plant costs. The 2025 simulations were
conducted without imposing additional constraints on thermal generation; i.e. the operation of thermal units was fully
optimized throughout the year, subject to must-run constraints on some units as specified by NOS BiH and/or the plants’
owners43.
Finally, we have run the model for 2025 to explore the impact of different assumptions and different modes of estimating
the costs. The model setup and assumptions are generally as explained in Table 6-1, but modified to represent 2025.
The thermal plants are not at all ‘locked’ to observed dispatch from 2019, but fully flexible. In some of the scenarios we
have considered a minimum load constraint for some plants with heating requirements, as indicated in the table below.
Scenario G considers the completion of Kakanj 8 and Tuzla 7 coal fired plants. The CO2-prices for BiH and the other
WB6 countries are either set at EUR 6.50 per ton of CO2 as a Base case, 0 in the ZERO case or EUR 11.70 per ton of
CO2 in the High case44.. The scenarios H and I consider less efficient cross-border trade, represented with a wheeling
charge such that there is no exchange unless the modelled price difference is higher than the wheeling charge.
Table 6-4 Alternative scenarios for 2025

Scenario Thermal plants Minimum load constraints CO2 price Wheeling charge
A All existing Yes Base
B All existing Yes Zero
C All existing Yes High
D All existing No Base
E All existing No Zero
F All existing No High
G All existing plus Yes Base
Kakanj 8 and Tuzla 7
H All existing Yes Base 1 EUR/MWh
I All existing Yes Base 2.5 EUR/MWh
43 For instance, several units need to supply heat during the winter season.
44 The assumptions for the Base and High case correspond to 25% of the assumptions for the ETS in the ‘EU-REG’ scenario in the recent EU impact assessment
and the SDS scenario in the 2020 edition of the IEA’s World energy Outlook, respectively.

Not surprisingly, increased CO2 costs results in lower BiH production and vice versa. In a case with a high increase in
emission costs, the efficient response from BiH plants would be to reduce production (and export) by 3-4 TWh per
annum. BiH national cost of electricity supply (as defined above) would increase with more than EUR 100 million, and
the importance of ensuring efficient dispatch and cross-border exchange would increase accordingly. Some key results
are summarised in the table below, as changes from scenario A.
Table 6-5 Results for 2025 (changes from scenario A)

Scenario Thermal plants Net export National cost of power
generation (TWh) (TWh)) supply (EUR million)
B +0.12 -0.28 +35
C -0.88 -0.88 +59
D +0.13 +0.14 -69
E -0.32 -0.32 +22
F -3.51 -3.51 +123
G +5.68 +5.68 +138
H +0.15 +0.15 +1
I -0.1 -5.74 +161
The regulatory challenge is how to take advantage of this potential efficiency gain into monetary benefits. The aim of
chapter 7 is to explore what options are available.

7 RELEVANT MEASURES TO IMPROVE LIQUIDITY AND CONTESTABILITY
Based on interviews, other analyses45 and our own analysis, we have considered a variety of potential measures to
strengthen competition and improve liquidity of the wholesale electricity market of BiH. Some of these measures aim at
improving the functionality and/or performance of organised power markets, most notably the short-term market, e.g. in
the form of a power exchange (PX), while other potential measures are not directly related to a PX. Some of the latter
could be considered even before a PX is operational.
The Energy Community Secretariat in 2019 published a Policy Guideline with a set of different measures that the
countries can adopt to boost the liquidity and to enable competitive price formation.46 These potential measures are
marked (*) in the overview table below and in the relevant subchapter heading. Some of the proposed measures
discussed by the Secretariat are related to REMIT. These are all highly important measures, but as they are already
implemented or must be implemented in BiH as part of the Energy Community law, they are not considered further in
this report.47
The considered measures are organised in subchapters as follows: First, we analyse the introduction of a power
exchange for short-term trade (day-ahead and intraday) and describe and analyse how this short-term market potentially
can be developed to a forward exchange also. Next, we describe and analyse the options for coupling a BiH PX with
neighbouring PXs (section 7.2). We continue focusing on measures aimed at directly enhancing liquidity and trade at the
PX (chapter 7.3) and measures typically aimed at both improving liquidity and mitigating market power in the wholesale
market (7.4).
The analyses aim to understand to what extent each measure might improve the performance of the wholesale market
and price formation in BiH. The sorts of impacts we are looking for are increased volumes in organised and transparent
markets, increased price transparency about the, reduced transaction costs, and better opportunities and stronger
incentives to efficient dispatch (production decisions). However, while it is easier for producers to ensure dispatch
decisions are efficient when the wholesale market is liquid and transparent, it is important to note that there are no
‘automatic’ links between these factors.
As the objective of this project is to improve liquidity, efficiency and competitiveness of the BiH electricity sector, the
primary evaluation criteria are potential impact and costs of each measure. In addition, implementation complexities and
fairness are considered.
Implementation complexity refers to the complexity of the measure itself, if multiple regulatory bodies must agree on a
specific measure or if SERC (or MOFTER) already has jurisdiction to decide for the entire BiH. As a general
observation, it should be noted that most (potential) regulatory decisions discussed below require similar regulation
across the whole of BiH in order to be efficient and avoid unintended consequences. Whether this is ensured because
SERC already has the power to decide on the matter for the whole BiH, or, alternatively, because all the regulators
agree on the matter, is not important for the impact of the measures. It might be more complicated to reach a
coordinated decision involving three regulators, and eventually, it might be needed to ensure SERC has sufficient power
alone.
45 ‘Other analyses’ comprises comments and statements from annual reports from SERC, FERK and RERS, the Energy Community Secretariat and other publicly
available reports. A full list is available in the Appendix.
46 https://energy-community.org/dam/jcr:6bb112a3-526e-4ebf-b265-84d6b392241c/PG_01_2019_ECS_WM_EL.pdf
47 This pertains to different measures on surveillance of undertakings’ conduct on a PX and preventing abuse of dominance, both by the market participants and
by the PX operator(s). REMIT requires that both PX operators and the relevant national regulatory authority have relevant monitoring programs and tools.

Table 7-1 Considered measures and recommendations
Category/measure What is it? Recommendation Complexity Impact
Power exchange (PX)
• Establish a BiH PX A PX for BiH trade only Recommended, as soon as Moderate Very
possible significant
• Regulated PX fee Regulatory approval of PX Not recommended; unnecessary Low Low
structure fees (for market
participants)
• Socialisation of PX Subsidised PX Not recommended; unnecessary Low Low
costs
• Forward markets Organised markets for No regulatory action suggested, Moderate Low on liq.,
contracts beyond day- but do not prevent BiH actors from high on
ahead using efficient trading venues competition
Coupling to neighbouring markets
• Import and export One-sided effort to ensure Recommended Moderate 4-7 TWH
zones cross-border volumes pass PX
through PX volume**
• FTRs instead of PTRs* Selling transmission rights Not prioritised; import/export Moderate 4-7 TWH
as FTRs instead of PTRs zones and market coupling far PX
more important volume**
Improve PX liquidity and attractiveness
• Procure grid losses at Require that network Recommended Low 1 TWh PX
PX operators purchase energy volume
for grid losses at the PX
• CfD instead of Require that contracts for Recommended Moderate 5-10 TWh
traditional contracts public supply are CfDs PX volume
• Market maker Requirement to maintain Not recommended; but voluntary Moderate Moderate
obligations* (narrow) bid-ask spreads market maker agreements is
encouraged
• Reduce admin barriers Ensure licensing and tax Recommended Moderate Low
routines are as lean and
harmonised with that of the
EU as possible
• Standardised contracts Standardised contract for Recommended Moderate Moderate
bilateral trade
• Obligation to offer or Requirement to offer certain Not recommended; unnecessary Significant Moderate to
trade at PX* volumes at certain prices and inefficient high
Improve PX liquidity and mitigate market power
• Non-discrimination Requirement to incumbents Not prioritised – better to reform Low Low
obligations* to offer externally on similar the public supply arrangements
conditions as internal directly
contracts
• Self-supply Limiting the volume of Not prioritised – better to reform Moderate Low on liq.,
restrictions* internal contracts within the the public supply arrangements high on
EPs directly competition
• Virtual power plants* Obligations to offer VPP Not recommended, market power Significant Low on liq.,
contracts to new entrants is not a major concern high on
and small actors competition
• Direct trading Obligations to offer Not recommended, market power Significant Low on liq.,
obligations* contracts to new entrants is not a major concern high on
and small actors competition
• Regulated access* Regulated access to Not recommended, not clear there Significant Low on liq.,
generation resources are such resources and that high on
controlled by incumbent(s) market power is a major concern competition
• Termination of bulk Ending internal contracts Not prioritised – better to reform Significant Low on liq.,
supply contracts* within the EPs the public supply arrangements high on
directly competition
**: The volumes indicated under Import and export zones and FTRs instead of PTRs are essentially the same and cannot be added.

The final recommendation for each measure is marked as either (1) recommended, (2) not prioritised or (3) not
recommended. A measure is not recommended when the benefits are smaller than the costs and/or the measure is
missing the objective, or otherwise seen unfit for BiH, or other measures can achieve the same for less effort. A
measure is recommended when the benefits are considered larger than the associated costs. A measure is not
prioritised if it is potentially beneficial, but other measures seem more fit for purpose in BiH, less expensive, and/or
should be subject to further analysis or potential implementation at a later stage.
As can be seen from the table, we recommend establishing a local BiH power exchange for day-ahead and intraday
trade as soon as possible. Market coupling with other day-ahead and intraday markets is important to ensure efficient
power exchange with neighbouring countries and is highly recommended. This should be done in a stepwise process,
however, with a simplified unilateral approach first. Full market coupling will take some time, and it is better to start with
a simplified solution instead of postponing opening of a local PX until all details for full market coupling can be in place.
We further recommend measures to ensure at least a minimum volume is traded at the PX. The unilateral approach to a
simplified coupling can ensure all import and export is traded at the PX (import and export zones). It is a simple measure
with very limited costs but can ensure a turnover for the PX in the magnitude of 4-7 TWh, depending on the sum of
annual export and import. Requiring all network operators to purchase energy for network losses from the PX can
further ensure to all generators that there is at least some demand at the PX (network losses are approximately 1.2
TWh/year). This is also a very low-cost measure; in fact, it can be profitable if it contributes lower overall costs for the
energy losses and a more efficient dispatch. Finally, requiring public suppliers to purchase electricity for regulated
customers from the PX would be a massive liquidity boost and ensure all generators have ample market opportunities.
The public supply is currently approximately 6.5 TWh annually. The measure might look dramatic as it will imply
changes for the internal contracts currently used within the EPs for this purpose. However, it is fully possible to require
the public supply companies purchase physically from the PX while at same time maintain a system of internal contracts
for differences (CfD) to protect against volatile PX prices. Similar to the approach for network losses, this is a low-cost
measure which might turn into a profitable measure if it can contribute to even more efficient dispatch.
We do not recommend any of the heavier measures discussed by the Energy Community Secretariate. There are
essentially two reasons for this: First, these are mostly complex measures, requiring a lot of regulatory attention in both
design and implementation. Several of them are normally quite controversial as they limit the ownership privileges of
large incumbent generators, and it will at least require a long design and implementation period. While all the PX
measures can essentially be implemented in less than a year, requirements e.g. to sell virtual power plants will typically
require more time and will also only have an indirect impact on liquidity unless combined with the prioritised measures. If
the prioritised measures are implemented, the heavier measures will not add anything that is not already achieved.
Second, the heavy measures are tailored to address monopolistic or oligopolistic behaviour. Hence, for these measures
we generally see significant administrative costs, but limited benefit for the consumers or the society in general.
However, we strongly recommend some of the lighter measures put forward by the Energy Community Secretariate:
Discrimination of market participants should be avoided as much as possible; it is by giving all actors equal opportunities
the best and most efficient and effective solutions can be developed. Furthermore, accounting separation is an
important condition to prevent cross-subsidies, inefficient pricing and avoid discrimination. Also, there seems to be
scope for reducing administrative barriers to entry and to participate in the market from abroad; some interviewees claim
that complex and burdensome administrative routines are what is stopping them from entering the BiH market. These
are all low-cost measures with attractive potential benefits, also beyond the scope of our study.
Finally, we recommend reviewing the current public supply arrangements, not only in terms of the arrangements for
these suppliers to purchase energy, but a wider analysis, particularly of the relationship between retail prices and
wholesale prices – both for the internal contracts and for external contracts for these suppliers.

7.1 Establish a BiH PX
A widely used measure to strengthen competition and improve liquidity of a wholesale electricity market is to organise
the short-term market in a power exchange (PX48). All neighbouring countries to BiH already have operational
exchanges or are in the process of establishing one, see chapter 8 for an overview. In this section, we explain the main
benefits of having a PX, the main alternatives for how a PX in one country can be coordinated with PX in neighbouring
countries, continue with describing the alternatives for establishing a PX before looking into the costs and potential
revenues for a PX. Last, we discuss alternatives for trading of contracts with longer duration than one day.
The basic assumption for this section is that a decision is already made to arrange for a BiH PX. The relevant key
question is then not whether to establish a PX but how to implement the decisions already reached.
7.1.1 The benefits of a short-term power exchange

A PX is an organised marketplace where buyers and sellers of electricity can meet on efficient and equal terms and
where liquidity in the market is pooled. All trades in the market are concentrated towards one auction for the following
day (or another time period, as the case may be). The primary goal for a short-term market is to establish a price such
that supply and demand, and consequently sales and purchases aggregated across all market participants, are in
balance. This process normally also considers the transmission capacities between areas (bidding zones, countries)
establishing an efficient cross-border flow of electricity. With an auction mechanism, the price formation ensures that
demand for electricity is satisfied at lowest possible cost to the society. The main market type used to achieve this in
Europe is usually a day-ahead auction market (DAM), determining prices and net positions for all participants for each
hour the following day, supplemented by an intraday market.
An intraday market allows for fine tuning and adjusting the portfolios of the market participants closer to the time of
delivery. The European intraday markets are mostly continuous markets, with trading around the clock until shortly
before the delivery of power starts. Recently, they are supplemented by discrete auctions. The intraday markets are
particularly important for small, independent producers and suppliers, as well as producers relying on variable
renewable energy. However, while the larger utilities typically can adapt easily also in the absence of intraday markets,
they are usually among the most active users of the intraday markets.
Organised markets, like PXs, are not the only way to determine net positions for each participant; this is already in place
in BiH via the balancing mechanism and the routines operated by NOSBiH. However, organising the short-term markets
by means of a PX ensures several important and vital benefits.
First of all, organised trade increases transparency of prices, volumes, and flows. While the public will not know who has
purchased or sold which volumes at what price for each hour, the aggregated volumes per hour will be part of the
publicly available market results. This also applies to prices and to cross-border flows. Some PXs also publish
aggregated supply and demand curves. All of this help market participants better understand the actual price formation
and development over time.
With more transparency and easily available information about short-term volumes, prices and price formation, both
existing and potential market participants will be better positioned to forecast future prices and understand the value of
new plants or optimise the utilisation of existing plants and storage. The market participants’ trust and confidence in the
prices they observe is likely to grow, thereby improving the basis for a forward market as well. Trust and confidence in
the price formation are also important to improve the bankability of new investments, in particular for independent wind
and solar projects.
48 Power exchanges can also organise forward markets (markets for long-term contracts). In this report, the term PX will be used as a reference to short term
markets, i.e. the day-ahead and intraday timeframes, only.

A third factor is that the utilisation of interconnection capacity is expected to improve by the introduction of a PX. A PX
requires routines and an optimisation algorithm to calculate (day-ahead) prices and volumes. Such algorithms typically
aim to maximise overall social welfare, i.a. by utilising transmission capacity implicitly when setting prices, directing the
flows from low price to high price areas (see below about market coupling). The potential benefits analysed in chapter 6
are to a large extent relying on the introduction of a PX serving BiH.
With a liquid short-term market, market participants will be less exposed to imbalance prices as compared with the
current situation in BiH. Furthermore, it will be easier for particularly independent market participants to consider if
imbalance prices are fair and efficient, which in turn will increase their trust in the market and the market design, reduce
barriers to entry and increase their willingness to take positions in the market and thereby contribute to improving the
liquidity.
Organised trading platforms and increased transparency also reduce transaction costs. The costs of searching for the
‘best’ counterpart will be eliminated. Weekly and daily optimisation of (portfolios of) generation assets will be easier;
asset owners can focus on defining the optimal generation plan while execution of the plan will be implemented in the
daily bidding decisions.
A PX can also provide clearing and settlement services. Typically, the PX will be a central clearing counterparty to all
transactions. With a central clearing counterparty, the counterparty risk in the BiH market will be lower for each market
participant and the overall market risk and cost related to this will be reduced. This will allow for efficient, cost effective
and secure financial flows, and contribute to reducing the actual transaction costs.
A major question is how a PX should be established. There are essentially two different options that are relevant for
establishing a local BiH PX, as highlighted in Table 7-2. Note that a combination of these two models is also
conceivable, e.g. by becoming a co-owner of an already existing exchange in the region. The potential benefits of this
approach over a serviced PX are, however, limited. The disadvantages are that a cooperation will tend to increase the
implementation time and complexity and may potentially cause further risks.
Table 7-2 Alternative models for establishing a local power exchange

PX business model External service BiH power exchange DNV recommendation and
provider responsibilities key reasons
responsibilities
Serviced PX Provide IT systems Local first-line support towards Recommended
and algorithm for market participants and Cost effective
External provider (other
calculation of prices, stakeholders Implementation time ~12
PX) of market operation
volumes and flows, Clearing and settlement services months from selection of
and trading platform
including market (agreement with banks, provider
services
coupling functions transactions, etc.) Ensures automatically
Local ‘front office’ (when feasible) Member management compatibility with the EU
supporting the members Technical support of (participant agreement, etc.) single day-ahead coupling
the trading system Market development (SDAC)
Market surveillance
(Requirement of REMIT)
Independent PX (Potentially provide All related PX business activities Not recommended
clearing services) Very expensive
A BiH PX with inhouse
Long implementation time
trading system and
Limited scope for local
operations, IT
solutions if market coupling
development and
with EU should be an option
clearing functions

Establishing an organised market will be an important step for BiH as it will bring multiple benefits for market participants
and other stakeholders, not to mention for the country as a whole. Most of the countries in the region run PXs based on
a serviced market concept having Nord Pool or EPEX as service providers; see Table 8-1 for an overview. The ‘nearest’
independent PXs today are in Italy, Turkey and Ukraine. Albania, Kosovo, Montenegro and North-Macedonia are all
aiming for a serviced PX solution and are in the process of selecting a service provider.
7.1.2 BiH PX cost and revenue analysis

Since it is difficult to get firm cost data on the PX operations in the region, estimates for a PX in BiH are uncertain. The
proposed structure and assumptions of this analysis is that the BiH PX would procure trading system services from an
external party, hence become a serviced PX, in line with what most of the other PXs in the region have chosen. The
analysis only includes a day-ahead market. Introducing other market segments (intraday, forward) impacts costs, but
does not change conclusions.
The only serviced PX in the region that publicly discloses cost data is HUPX, the Hungarian PX. HUPX cost for
operating a day-ahead market gives us some indication of what BiH could expect with regards to costs. Hungary is a
larger country with a more developed electricity market, hence their need for and requirements to PX systems and
services are more extensive then what is expected initially with regards to BiH. HUPX shows a cost of approximately
EUR 440,000 per year in trading system costs related to operation of the day-ahead market.49 This does not include
market coupling services; these will come at an additional cost. Hungary’s electricity consumption was 43 TWh in 2019
(IEA50), and the HUPX day-ahead market had a trading volume of 25 TWh in 2020.51 HUPX has 64 active market
participants.
Croatia and its PX, CROPEX, could be a better reference for the costs of operating a small PX. Unfortunately, CROPEX
does not disclose their cost but Croatia is a good reference with regards to market volumes. Croatia has an electricity
consumption at around 17 TWh in 2019 (IEA52). In 2020, CROPEX had a trading volume of 6 TWh in the day-ahead
market. 22 market participants were active on the market.53
Looking at BiH, the country has an electricity consumption of about 12 TWh in 2019. Assuming the PX would have a
maximum of 20 market participants initially on the local day-ahead market, a fairly small team to operate the market and
serve the participants will be sufficient. By using the other small PXs in the region as a reference, it is expected that a
team of four to five persons would be enough staffing in the beginning. This would enable the team to take on the
different roles needed to both operate and develop the market further.
With a serviced PX, a lot of the operational tasks and actions are on the service provider side. These actions are mostly
concentrated to the mid-day (running the auction – from overseeing the collection of orders and network data to
distribution of results to each participant). Technical support to participants, directly or via the serviced PX, might be
needed throughout the day. It is, however, not expected that this will require a full-time resource at the service provider
side. Looking at the HUPX cost, the size of market and expected number of participants, it is estimated that the trading
system platform service fee for BiH could be some EUR 150,000 to EUR 250,000 per year initially. Other costs involved
are office location in BiH, other IT services, legal work, and salaries to the local PX team. In total, this sums up to around
EUR 700,000 per year for the day-ahead functionality. An overview of these estimates is presented in Table 7-3 below.
49 https://hupx.hu/hu/rolunk/kozerdeku-adatok
50 https://www.iea.org/countries/hungary
51 https://hupx.hu/uploads/Piaci%20adatok/DAM/%C3%A9ves/HUPX_DAM_OLAP_Yearly_external_4MMC_2020.pdf
52 https://www.iea.org/countries/croatia
53 https://www.cropex.hr/images/CROPEX_Annual_report_2020.pdf

Table 7-3 also provides an illustration on how this cost can be covered via fees to market participants. Using the same
fee structure and level as common on European PXs does not seem to cover all costs, at least for the first years.
However, this depends to a large extent on which measures are applied to ensure sufficient liquidity. Without such
measures, fees must either be set quite high (relative to neighbouring markets) and/or external funding is needed – at
least for an initial period. See section 7.3 for some potentially relevant measures to increase liquidity and PX volume.
With sufficiently large volumes, the PX fees could be set lower than used in Table 7-3.
Table 7-3 Estimated PX costs and example revenues in Euro (Source: DNV calculations)
BiH Market Scenario 1 2 3 4
Traded volumes DAM (MWh) 1 000 000 2 000 000 3 000 000 4 800 000
Number of new participants 10 10 0 5
Total number of participants 10 20 20 25
PX Revenue (€) Fee structure

One-time fee (Entrance fee – new participant) 15 000 150 000 150 000 0 75 000
Day Ahead market
Annual fees
· Annual participation/membership fee 12 000 120 000 240 000 240 000 300 000
· Annual technology fee 4 000 40 000 80 000 80 000 100 000
Volume-based fees (Euro/MWh)
· Trading volume fee 0,06 60 000 120 000 180 000 288 000
· Clearing/settlement volume fee 0,02 20 000 40 000 60 000 96 000
Other fees
· Reporting service (REMIT) fee (Not included) 0 0 0 0
· Market data service fees (Not included) 0 0 0 0
· Additional technical fees (additional portfolios etc.) (Not included) 0 0 0 0
Total revenue: 390 000 630 000 560 000 859 000
PX expenses (€)
Operation of a DAM trading platform (without SDAC coupling services) 200 000 200 000 200 000 200 000
SDAC coupling services 150 000
Local office 60 000 60 000 60 000 60 000
IT services, bank, etc 100 000 100 000 100 000 100 000
Legal work 40 000 40 000 40 000 40 000
Salaries (4-5 persons in BiH) 300 000 300 000 300 000 300 000
Total expenses: 700 000 700 000 700 000 850 000
Operating earnings (€) -310 000 -70 000 -140 000 9 000
The split between fixed, annual fees and volume-based fees used in Table 7-3 is an example, although it also reflects
the common practice at other exchanges.54 It is important to ensure the fees and the fee structure is not a barrier for
entry for small participants, e.g. by having high fixed fees for participation on the PX. An alternative to the example in
Table 7-3 is to differentiate fees based on the participants installed capacity or maximum load.
In year 4 of the example, market coupling with the EU is anticipated. Based on HUPX cost and the size of the BiH
market, we estimate this service to cost roughly EUR 150,000 per year. The example anticipates that when BiH couples
with the SDAC, a few more market participants would join the BiH PX and traded volume will increase.
54 Because PXs are generally competing in Europe, their costs and fee structure is generally not disclosed publicly. However, countries that have opted for a
monopoly arrangement for the PX usually publish some information.

A key take-away from Table 7-3 is that a trading volume of ~4.8 TWh and about 25 market participants would be needed
to cover the operational expenses of the BiH PX. In recent years, the licensed entities have traded ~5 TWh within BiH
and 6-7 TWh in total cross-border trade (export plus import). The measures proposed in chapter 7.3 should in total give
an annual turnover at the PX at 10 to 18 TWh.
7.1.3 Regulation of fee structure at PX

The cost of participation at an organised market will generally affect the liquidity. In addition to the level of the PX fees,
the fee structure is potentially quite important. The fee structure comprises the mix of volume based and fixed fees,
potentially also the use of one-time fees. For volume fees, it is conceivable to distinguish between MWh and transaction
fees. The volumes fees are usually split between the different market segments, such as the day-ahead and intraday
market.
The most common structure is a fixed annual fee, independent of the size of the portfolio or market participant, and a
MWh based fee, often split in a trading fee and a clearing fee where the latter is dedicated to cover the costs of
managing counterpart risks while the former somehow reflects the costs of the trading systems at the PX. In addition,
there might be fees to cover costs of reporting to REMIT and other data services, as well as separate technology fees
charged for costs related to the trading platforms. Table 7-4 summarises the general fee structure seen among the
existing PXs in the region.
Table 7-4 General PX fee structure observed in the Balkans

General PX participation fee structure
One-time fee • Entrance fee – new participant
Annual fees (per market segment) • Annual participation/membership fee

• Annual technology fee
Volume-based fees • Trading volume (netted) fee

• Clearing/settlement volume (netted) fee
Other fees • Reporting service (REMIT) fee

• Market data service fees
• Additional technical fees (additional portfolios etc.)
For the volume-based fees, it is common practice in Europe to charge only the netted volume of a participant’s trade
during one market time unit (usually an hour). In this way, vertically integrated companies could use the PX for internal
transactions without seeing their significant volume as a cost issue. While this potentially implies the fee per MWh will
have to be higher than if the fee was applied on gross trade, the key objective is to ensure the vertically integrated
companies don’t limit their exchange trade to the netted volume only. If the latter happens, the ‘necessary’ volume fee
will essentially be the same regardless if netting of fees is applied or not.
An important challenge is to ensure low barriers to entry into the organised market. This particularly relates to smaller
market participants where the yearly participation fee and cost of holding collaterals needs to be manageable. Annual
fees are thus sometime split in one fixed part and another part depending on the number of active traders or portfolios,
resulting in a somewhat higher fixed cost for large participants as compared to the smaller ones.

The benefit of netting is increased transparency in terms of higher volumes passing through the PX. There will be no
direct impact on concentration or the competitive pressure. It is not likely that it will lead to any immediate changes in
how market participants buy or sell to other parties. However, the increased transparency will potentially contribute to
more efficient dispatch, due to better valuation of production and storage opportunities.
There are essentially no relevant costs of applying netting of volume fees. Without netting of fees, market participants
will submit only their net order to the PX, such that the net volume is the same anyway.
Conclusion
The regulatory decision to make is if and eventually how the PX fee structure should be determined by the regulator.
Typically, the PX operator and the regulators will share the same concerns and objectives; maximise liquidity,
transparency and price discovery. While we recommend that a BiH PX follows a similar fee structure as seen in the
neighbouring PXs, it is not evident this needs to be subject to special regulation. If the PX operator agrees, it might be
sufficient that, eventually, the regulator can decide to intervene in future disputes.
Consequently, we do not prioritise an explicit regulation of the PX fee structure – we anticipate that the PX in any case
will find the best possible fee structure, including to make sure the volume fees are netted. However, we recommend
that the state regulator is entitled to determine the fee structure if needed.
7.1.4 Socialisation of PX costs

A common question when establishing power exchanges is how to cover the costs of operating the PX. Several of the
early PX in Europe were established by the TSOs. The TSOs typically depend on the PX to ensure proper short-term
planning of the transmission network: which power stations will produce what volumes tomorrow? Are production and
consumption plans in line with the physical limitations of the transmission network? Hence, TSOs both have a need and
an obligation to ‘help’ starting the market by setting up a PX. While the intention in most cases was that the PX
participants should cover the costs of operating the PX, this was likely not always the case in practice. Some
socialisation of PX costs in the early phases of de-regulation in Western Europe is conceivable. Nowadays, we are not
aware of any such subsidies of PX costs in Europe.
Today, several of the European power exchanges, both for short-term and for forward products, are competing in the
same markets. Their fees are generally not publicly available due to concerns for market power in the provision of PX
services. The market for operating and servicing PXs is dominated by two large competitors, Nord Pool and EPEX/EEX,
which again are dominated by the two major exchanges in Europe – Euronext and Deutsche Börse. European
competition authorities are generally concerned about the limited competition between exchanges, also in the power
market.
Membership and transaction fees will generally impact participants’ willingness to use a PX. Socialisation of PX costs,
particularly in the first period after introducing PX trading in a country can have merit if the costs are likely to be so high
that market participants are likely to seek alternatives to using the PX. This can in principle be relevant if there are
significant start-up costs. To what extent that is the case, depends most importantly on how a PX is implemented. As
explained above, there are different routes to establishing a PX, with different start-up costs.
An alternative to socialisation of PX costs is to make the use of the PX mandatory or more beneficial. Being the only
route to neighbouring markets, such that day-ahead cross border capacity is only available via the PX, is an obvious
example of the latter, see section 7.2. Another example is ensuring market participants pay fees based on net rather
than gross volumes, as explained in section 7.1.3.
Socialisation of PX costs would normally imply that either taxpayers or grid customers cover the costs, instead of the
companies trading at the PX. Incumbent producers and suppliers to domestic end users will normally cover all their
costs from their customers, including PX fees they eventually induce as part of their normal operational costs. Thus,

ultimately it does not appear to be a big difference for the energy users how the costs are covered. It seems more
important to ensure that trade is efficient and transparent. Hence, to what extent socialisation of PX costs has merit
largely depends on the size of these costs and the market participants’ alternatives to using the PX.
Beyond the actual subsidy, there are no significant costs of this measure.
Conclusion
As illustrated by the sections above, there are multiple measures that can ensure the PX fees are quite small, all of
which are quite cost efficient. We thus see the risk for low PX liquidity due to high costs as quite small, in particular if
BiH opts for a serviced PX (see Table 7-2) and implement at least some of the other liquidity boosting measures, like
purchase of grid losses, conversion to CfDs and setting up import and export zones. Hence, we do not see any
immediate need for socialising the PX costs.
7.1.5 Exchanges for the forward timeframe

As a continuation of the basic market offering from a BiH PX with a day-ahead market and potentially an intraday
market, a platform for forward trading could be established. Such a platform would standardise the forward trading,
enhance liquidity in forward markets and increase transparency. A forward platform would facilitate price and
counterparty discovery, making it easier for the market participants to balance their portfolios across future periods.
There are two different types of exchange-based forward markets. A lot of European short-term power exchanges also
organise markets for forward contracts, see Table 8-1. The German EEX is operating the largest European exchange-
based forward market. The sister-company, EPEX is organising day-ahead and intraday markets in 15 countries.
However, other forward exchanges are not directly related to the short-term markets. Nasdaq, primarily serving the
Nordic market, and ICE, primarily serving the British and the Dutch market, are examples of the latter type.
An alternative to a PX-based forward market (like EEX, Nasdaq and ICE) is a less formally organised forward market.
These are often known as OTC markets or bilateral markets. The degree of contract standardisation tends to be lower in
OTC markets than in exchange-based markets.
Exchange-based markets are generally subject to strict regulation, while this, unintentionally, is not always the case for
OTC markets. The forward contracts are mostly financial contracts. This implies the exchanges are not necessarily
located in the countries where the contracts are traded. One of the potential competitive advantages of one exchange
towards competing exchanges, is localisation with a track record for strong, effective and efficient regulation of
exchanges (like Germany). However, some exchange customers might view this differently. In any case, it is generally
hard, if possible, to prevent e.g. a BiH company from buying or selling a forward contract at a forward exchange in
another country.
The choices on how to implement a short-term PX have only minor impact on the opportunities to facilitate forward
trading. Similarly, whether the most attractive forward market for BiH market participants is an already existing exchange
in another European country or a local exchange for BiH, has little impact on the choices for a short-term PX. Short-term
and forward PXs are not necessarily linked in any other way than that the products listed at forward exchanges are
referring to the same geographical area as the short-term PX, and if the forward contracts are financial contracts, they
are settled against the prices determined at the short-term PX.
Conclusion
There is no direct impact on liquidity and competition from introducing a forward market. Under the ‘right’ conditions, the
market will take care of this anyway.
It seems more important to ensure BiH market participants are able to take advantage of efficient forward markets than
to ensure the trading venue is located in BiH or under BiH jurisdiction. Furthermore, it is important that BiH regulation

not unintentionally prevents BiH traders from using the most efficient hedging instruments, e.g. by requiring physical
settlement of contracts.
However, we do not see any scope for regulatory measures, e.g. in terms of establishing a forward market. Hence, we
do not recommend any particular action in this point.
7.1.5.1 Clearing arrangements

Clearing is a service by a financial intermediary between a buyer and seller, often called a central clearing counterparty
(CCP). This financial structure aims to reduce the credit and counterpart risk in a market. With a CCP, all transactions
are done towards one single financially solid counterparty. When/if a local exchange for forward contracts is operational,
clearing will be an integrated part of the service from the exchange.
The objective of a clearing service is to cover the risk of a participant going into default. The method is typically that the
CCP requires some sort of collaterals, starting before trading is initiated and continuing through the delivery period.
Clearing is essentially a sort of insurance against credit and counterpart risks, and unless the actual counterparts know
each other very well, it is commonly used also in mature markets where bilateral/OTC contracts is the common way of
trading. The clearing costs are essentially considered lower than the value provided by the service.
In the context of this analysis, the merits of clearing arrangements depend on which market context to plan for. With the
current structure, there does not seem to be sufficient demand for clearing arrangements. The incumbents are primarily
on the sell side, and as long as they have sufficient due diligence of counterparts, they do not seem to require further
measures to manage counterpart risks. When/if a forward market is implemented, clearing will naturally be embedded
as part of the service provided by the exchange.
The question thus seems to be if and to what extent a standardised bilateral/OTC market should be encouraged by BiH
regulators. On the one hand, this could be a relatively simple approach to develop a local forward market. The
administrative costs of supporting a bank to provide clearing services for standardised forward contracts are limited. The
services would have to be provided in a competitive environment, such that clearing of bilateral/OTC contracts is an
offer and not an obligation to market participants, and such that if the clearing costs are ‘too high’ counterparts will
proceed without clearing. On the other hand, bilateral/OTC trade is generally not subject to very tight regulations. While
organised markets like day-ahead and forward exchanges are normally subject to strict and extensive regulation,
regulation of bilateral transactions tends to be rather soft except for market participants’ requirements to comply with
REMIT and other behaviour rules regarding transparency, prohibition against trading on asymmetric information,
disclosure of information, etc.
The potential role of regulatory authorities would thus presumably be limited to encouraging the establishment of a
clearing service and, if needed, adapt regulation such that clearing arrangements have a sufficient legal framework to
rely on.
Conclusion
While clearing arrangements are generally self-financing and useful in increasing liquidity of forward markets, we
suggest BiH regulators do not prioritise efforts towards establishing clearing mechanisms or arrangements at the current
stage. Clearing services are included and an important feature of any exchange-based short-term and forward market.
7.1.6 Intraday trading

The cost example explained in section 7.1.2 does not include any intraday trading. The reason for this is simply to make
the cost example more transparent, not to suggest that this service should not be offered.

Regardless of the choices with respect to coordination with neighbouring countries and choice of implementation model,
intraday trading opportunity is a natural part of any short-term PX setup.
With an independent PX, it is likely that requiring intraday opportunities from the very beginning will cause a later
possible launch date. With a serviced PX, this risk is significantly smaller and it seems feasible to launch a local PX
relatively fast, and to include intraday solutions already from the outset.
There is a cost side of introducing intraday solutions, and if the demand for such services is limited, it might be beneficial
not to include it from the first day of operation.
7.1.7 Recommendations for establishing a PX

Considering the benefits of organising the short-term electricity trade as a PX, explained in section 7.1.1 above,
establishing a short-term PX should have the highest priority in the further development of the BiH electricity sector.
Also, the benefits of more efficient dispatch explained in chapter 6 will be hard to capture without better contracting
opportunities for short-term trade. The importance and the potential benefits will increase as BiH develops its renewable
energy sources. The key benefits are:
• Increased transparency of prices, volumes, and cross-border flows
• More precise and trustworthy price forecasts
• Better utilisation of interconnection capacities
• Reduced imbalance risks
• Reduced transaction costs
The process of establishing a PX in BiH has been slow and the country has not yet adopted a new state level law
transposing the Third Energy Package. The current energy law does not provide a basis for establishment of a PX.
However, REMIT has been transposed by the regulator SERC during 2020 and a reporting mechanism is established.
• Our clear recommendation is that the necessary legal changes are made such that a PX can be established,
the sooner the better.
• A serviced PX approach provides benefits in terms of speed and costs, without any disadvantages as
compared to an independent PX. Also, a serviced PX is a local PX, but it does not remake IT-systems and PX
rules that are already developed and fully functional.
• Further, we recommend that it is implemented with separate import and export zones already from the start
(see section 7.2.1, unless it becomes evident that some form of volume coupling can be implemented without
delaying the PX itself.
• In order not to lose speed, we suggest that legal and regulatory changes necessary for intraday trading are
also implemented as soon as possible. However, it should be considered if postponing the launch of intraday
functionality is beneficial. While having an intraday market from early on is most likely the best, one should be
careful not to make the best an enemy of the good.
7.2 Coupling with neighbouring PXs

There are different options regarding how the utilisation of cross-border capacity is integrated in the PX. In the EU,
market coupling is a prioritised part of the European target model. Before the current market coupling design (often
called a price coupling) was developed, the internal borders within EU utilised various and less integrated methods often

referred to as loose or tight volume coupling. When neither of these methods are applied, the alternative is often an
explicit auction regime. Explicit auctions means that (access to) cross-border capacity is auctioned separate (and
explicit) from an energy auction; successful buyers of cross-border capacity will typically buy and/or sell energy in other
auctions than the auction for cross-border capacity.
Price and volume coupling are different forms of implicit auction of cross-border capacity allocation. Implicit means that
energy and transmission capacity are traded together – access to cross-border capacity is implicitly granted to all
participants in the related energy auction(s). Market participants buy and sell energy within their home market (bidding
zone) while the involved power exchanges have algorithms in place to ensure the best possible utilisation of the cross-
border capacity. The algorithm applied by most EU countries as well as Norway is Euphemia. 55 The day-ahead market
is often referred to as SDAC – the Single Day-Ahead market Coupling, while the intraday market is called SIDC – the
Single IntraDay market Coupling.
To briefly explain the alternatives, we can take a look at Britain: Since Brexit, Britain is excluded from participating in
SDAC and SIDC. According to current plants, it is anticipated that instead, a Multi Region Loose Volume Coupling
(MRLVC) arrangement will be developed for the British interconnections and provide market coupling between Britain
and SDAC. This is intended to replace the current (and temporary) explicit allocation arrangements in place for the
connections to Ireland, France, Belgium, and the Netherlands. Norway and Britain will use a separate price coupling
auction one hour prior to SDAC until MRLVC is operational.
In addition to the British alternatives, an additional alternative for a BiH power exchange is to include separate import
and export zones in an essentially domestic or internal BiH PX.
The key features of the different models are described in the table below, starting with the models that are easiest to
implement. Unfortunately, the expected efficiency of each model seems to be proportional to the complexities of
implementing and operating the different models. However, the complexities are generally considered as small, relative
to the potential benefits, even as complexities increase. For all alternatives, it is assumed there is a PX in BiH, and a PX
in adjacent countries as well.
Like the case has been in the EU, a development over time is not only conceivable, but potentially also a good way to
implement an efficient coordination. Becoming part of the EU market coupling will take time. Meanwhile, other options to
coordinate cross border flows should be explored. An easy implementation path for establishing a BiH PX is to start by
operating as a local (BiH only) market, gradually improve the coupling with neighbouring countries and ultimately aiming
to join the EU market coupling. That corresponds to following Table 7-5 from top to bottom. One would not have to
follow all steps; leapfrogging is possible.
Starting from a BiH only PX, the first option is to consider establishing import and export zones for Croatia, Serbia, and
Montenegro. By establishing such zones, the market participants can use the PX to optimize their cross-border trading.
To make this possible, NOSBiH must provide the BiH PX with available transmission capacities that could be utilized by
the organized market, and the nomination routines for those who have purchased PTRs to or from BiH must be adapted,
at least on the BiH side. This is further analysed as a liquidity boosting measure in section 7.2.1 below.
All other market coupling models require a more extensive cooperation between all involved ISOs or TSOs, and in most
cases also the PXs of the involved countries. Aiming to join e.g. the SDAC coupling is clearly a good goal, but as it will
take some years to implement, it will not have any immediate impact on the wholesale market.
55 See e.g. https://www.nordpoolgroup.com/globalassets/download-center/single-day-ahead-coupling/euphemia-public-description.pdf for a public description.

Table 7-5 Different approaches to market coupling
Type of Basic description
coupling
Explicit Import and export capacity traded separate from the energy. Actors buy PTRs in separate auctions,
auction of inform the ISOs about planned utilisation (nomination to ISO). The PX is not involved in cross-
physical border flows, but actors using PTRs consider the volumes when buying or selling from or to the PX.
transmission
Very high risk for suboptimal flows and abuse of market power. Simple implementation. Does not
rights (PTRs),
require PX cooperation across borders.
no coupling
Export and Actors buy PTRs in separate auctions, inform the PX about planned utilisation (nomination to PX).
import zones, Nomination will be considered as sold (bought) volumes in separate import (export) zones and
no coupling bought (sold) volumes in the local BiH bidding zone. Separate prices for import and export will not
be calculated – the prices will be equal to the local BiH prices.
High risk for suboptimal flows and abuse of market power, due to the PTRs. Simple
implementation. Ensures all export and import volumes are traded via the PX, but not necessarily
reflecting prices (hence the suboptimal flows). Does not require PX cooperation across borders.
Separate price Formerly known as the Kontek model, to be implemented at the North Sea Link. Essentially, a
coupling separate application of the SDAC algorithm Euphemia, but before or after the SDAC auction. A
separate auction with at least two bidding zones; BiH and a neighbouring country. It implies two
day-ahead prices for BiH for any hour, but it is expected that the aggregated difference between
these will be small over time. PTRs must be nominated to ISOs, that subsequently consider these
flows when calculating what capacities the PXs can use in their algorithm.
High risk for insufficient flow, some risk for suboptimal flows. Requires cooperation between
neighbouring PX and TSO/ISO.
Loose and Twostep process in which cross border flows are determined first and local prices and volumes per
tight volume participant determined afterwards. Tight volume coupling employs all relevant data (cross border
coupling capacity, PX orderbooks, PTR nomination) when calculating the cross-border flows, whereas loose
volume coupling ignores some information elements (like the PX order books).
Low risk of suboptimal flows, but larger for loose volume coupling than for tight. Requires
cooperation between neighbouring PX and TSO/ISO.
Price coupling This is the SDAC approach; all available information about already planned cross-border flows is
considered, as well as all order books for all involved PXs
Minimal risk of suboptimal use of cross zonal capacity. Requires good and extensive PX and TSO
cooperation across all zones.
7.2.1 Import and export zones added to a local PX

Currently, import and export between BiH and neighbouring countries is arranged by means of physical transmission
rights, PTRs. Without a PX, this is the most practical approach to ensure reasonably efficient cross-border flows. With a
local PX, there are other options at hand.
Until an EU style of market coupling is in place, a potentially interesting regulatory measure is to require the BiH PX is
set up with separate import and export zones, in addition to the BiH bidding zone itself. The idea is that PTR owners

inform the PX about planned utilisation (nomination to PX). Nomination will be considered as sold (bought) volumes in
the separate import (export) zones and bought (sold) volumes in the local BiH bidding zone. Separate prices for import
and export will not be calculated – the prices will be equal to the local BiH prices. The transaction volume on the PX
because of the nomination of a specific PTR is netted out to zero, and the PTR owner will have bought and sold the
same volume for the same price, so that the energy settlement for this transaction will amount to zero regardless the PX
price.
The benefit of the approach is to ensure import and export volumes are visible via the PX, thus improving market
transparency. Transparency also implies a clearer valuation of the PTRs and the cross-border opportunities offered by
utilisation of PTRs for the PTR buyers. However, the method itself does not add anything in terms of reduced
concentration, increased competition or improved dispatch, except what follows as a result of increased transparency.
The import volumes to BiH has been around 1.5 TWh and export has been at approximately 5.5 TWh per year, which
eventually will be added liquidity at the PX.
The use of these zones could be ensured by a regulatory requirement and/or by economic incentives. The latter was
historically used in Norway in the early 1990s. Norwegian producers holding PTRs for export to Sweden were given a
choice between nominating and executing the PTRs themselves, and pay a significant nomination fee, or alternatively
sell the volume intended for export at what is today known as Nord Pool, only subject to the normal PX fees, and receive
compensation as if the PTR was a financial transmission right (FTR). In turn, Nord Pool would arrange for export to
Sweden, but only if that was the most efficient use of the energy for sale in Norway (at the PX). The PTR holders quickly
discovered that they could not do this better themselves, and thus instead of paying the high nomination fee, they
voluntary started using the PX for export, without further regulatory involvement. The nomination fee thus became a
rather hypothetical than real cost. The arrangement was approved by the Norwegian regulator.
The alternative implementation approach would be a regulatory decision requiring all PTR buyers to make use of the
import and export zones to the extent they would like to use their PTRs.
The administrative costs of introducing export and import zones at an uncoupled local PX are small. For a serviced PX,
the functionality is essentially embedded or easily available in their existing systems. Because this measure relies upon
existing PTR arrangements, there is no need for further agreements or routines towards the TSOs and PXs of other
countries – this is entirely a local BiH arrangement and can be implemented without further discussions with neighbours.
The arrangements in the other countries may continue as they already are. As such, it is the easiest way to start
developing a true market coupling.
PTR owners will be subject to PX fees for the PTR volumes with this approach. If PX fees are based on netted volume
(see section 7.1.3), there would be no volume fees to pay for the utilisation of a PTR. However, another option is to
apply the PX volume fees for the local BiH zone only, such that PTR owners effectively will have to pay the PX fees as if
they were only acting within BiH.
Conclusion
Until a proper market coupling arrangement can be implemented, we highly recommend that the BiH PX is set up with
separate import and export zones and that PTR holders are required to use those when using their PTRs. This will
ensure an added liquidity of 6-7 TWh for sale at the PX.
We also recommend that the associated PX fees are applied only for the transactions in the local BiH zone, not in the
export and import zones.
7.2.2 Financial instead of physical transmission rights*

The Energy Community Secretariat listed financial transmission rights (FTRs), or, more specifically, converting physical
transmission rights (PTRs) to FTRs as a potential measure to boost PX liquidity. An FTR setup ensures the physical

utilisation of the cross-border connections is optimised by the PX (if coupled with neighbouring PXs). The energy for
import or export will ‘automatically’ pass through the PX and thus boost liquidity.
In our view, the topic of transmission rights is more complicated than it might seem at first glance.
In European markets, transmission rights have a different interpretation, implementation and impact than in the nodal
US markets for electricity. While the idea of transmission rights essentially is to improve the hedging opportunities for
supply or demand investments, supporting cross-border hedging and allowing participants in one market to ‘borrow’
liquidity in a neighbouring market, the EU implementation limits the duration of transmission rights to one year. Parties
seeking a 5- to 15-year hedge for their investment would have to compete in annual auctions to purchase the
transmission rights. There are no long-term transmission rights for sale in the EU.
Furthermore, the sellers or transmission rights, normally the TSOs owning the cross-border interconnections, are
entitled to choose designs such that the transmission rights actually offered in the Western Europe are less important as
hedging instruments and more important as trading instruments. TSOs may choose between physical and financial
transmission rights (PTRs and FTRs). Unless both connected markets have a PX, the transmission rights are PTRs.
The FTRs are conceivable in two different forms; FTR options, which have a pay-out, or value, equal to PTRs (but in
cash, not settled in energy) and FTR obligations. While FTR obligations are the only transmission rights that actually
eliminates cross-border price risks, TSOs are unwilling to sell them as they entail unlimited counterpart risks for the
selling TSOs. FTR thus normally refers to FTR options.
PTRs and FTR options are one-sided options and generally unfit to reduce the revenue volatility for the buyer, except for
some trader portfolios. For this reason, most FTR options and PTRs are sold for less than the revenue they provide to
the buyers. TSOs selling FTR options or PTRs end up with less congestion rent than if they had not sold the
FTRs/PTRs, and a net transfer to energy trading firms from those covering the TSO costs (typically via tariffs). The
producers and consumers in the market will generally not have better hedging opportunities.
If it is decided that the TSO should offer transmission rights56, it is indeed better for the market liquidity and efficiency to
offer FTR options than PTRs. With PTRs, the owners will have to nominate daily the use of their transmission rights
prior to any day-ahead auction, but this will not necessarily result in increased volumes at the short-term PX – the
nominated use can be fulfilled without trading at the PX. With FTRs, those who want to contribute physically to a cross-
border flow will have to bid accordingly at a PX.
Unless the connected markets have a market coupling arrangement in place, there is a risk of sub-optimal use of PTRs,
nominating transport from high price areas to low price areas, or not nominate and use the PTR from the low price area
to the high price area. This could be the result of PTR owners accidentally failing to optimise the use of the PTR, or it
could be strategic behaviour in an attempt to distort prices. This risk is eliminated with FTR options, as these have no
nomination rights or rights to physical flow of energy between coupled markets. It is also eliminated with any of the
coupling arrangements listed in Table 7-2
Hence, there is no doubt FTRs options are better than PTRs in improving liquidity in a PX, all else equal.
However, it is not conceivable that FTRs contribute significantly to increase PX volumes as compared to a situation
without transmission rights at all. It is the market coupling that drives PX volumes; the FTRs only reallocate the financial
risks following from the price differences between the coupled markets. This positive volume effect of market coupling
can be reduced if combined with PTRs. Hence, to the extent transmission rights are sold, they should indeed be sold as
FTR options whenever possible.
In the absence of a local PX, or if the local PX is not coordinated at all with neighbouring markets, PTRs are the only
means to facilitate cross-border trade. When a local PX is established and this has some sort of coupling arrangement
56 The FCA guideline (Commission Regulation (EU) 2016/1719 establishing a guideline on forward capacity allocation) requires TSOs to offer transmission rights
unless concerned regulatory authorities explicitly have decided not to. Within the EU, the Nordic NRAs are the only ones using this opportunity.

in place, transmission rights are no longer needed to ensure that the volumes that are meant for export or import are
traded at the local PX.
The potential regulatory measures related to FTRs are (i) to require that transmission rights are sold in the form of
FTRs, and/or (ii) to require that the TSO/ISO offer transmission rights (as the current practise is).
When a PX is in place, the impact of requiring the sale of transmission rights is normally reduced revenue to the seller
and increased profits for traders. Historically, sale of PTRs and FTRs in Western Europe has resulted in 20 to 40
percent lower revenue related to cross-border flows than if the PXs had a market coupling and the TSOs simply
collected the congestion rent (the hourly price difference). As a result, network tariffs are normally higher than they
otherwise could have been. The sale of a transmission right means that a trader pays a fixed amount for the right to
collect the congestion rent for the duration of the PTR or FTR. The 20 to 40 percent loss for the seller is also the profit
opportunity for the buyer. In such cases, sale of transmission rights is effectively a transfer to traders from those paying
the transmission tariffs. Some TSOs offering less than the actual capacity in the FTR auctions experience a much lower
loss from the sale of FTRs, in some cases the revenue from the sale of a limited FTR volume is higher than the
foregone congestion rent.
If, on the other hand, it is already decided that transmission rights should be offered, there are no relevant costs in
requiring these to be FTRs. The administrative costs of the actual sale, arranging the auctions etc., are similar. The
experience from Western Europe is that when traders are given the choice between PTRs and FTRs between coupled
PX markets, they generally seem to prefer FTRs. Most PTRs with Use-It-Or-Sell-It (UIOSI) conditions are not
nominated, which means the PTR buyers use them as FTRs.57
It follows from the discussion above that if a market coupling is in place, there are no further benefits in place in terms of
reduced market concentration or increased competitive pressure. Such impacts are due to the market coupling itself, not
to the sale of transmission rights.
If a market coupling is not in place, because at least one of the connected markets don’t have a PX, there are indeed
potential benefits in terms of increased competition, reduced market concentration and more efficient dispatch.
However, as suggested by the dispatch analysis in chapter 6, these benefits are hard to harvest completely without
efficient short-term markets.
Conclusion
We do not prioritise this measure. When a BiH PX is in place, we rather recommend that cross-border trade is organised
by means of import and export zones until full market coupling can be achieved.
However, we highly recommend that to the extent transmission rights are offered, they are eventually sold as FTRs
once a BiH PX is in place, in line with the EU guideline on Forward Capacity Allocation (FCA). This will ensure that
transmission rights don’t reduce the PX liquidity.
We further recommend that the volume offered for sale as FTRs is limited to what the market really appreciates. For this
purpose, a methodology in line with the FCA guideline should be developed by SERC.
7.3 Measures to improve PX liquidity

Assuming a PX one day will be operating in BiH, the next question is how to ensure the PX becomes an attractive and
liquid venue for power producers, suppliers and potentially some of the largest industrial end-users. In this section, we
analyse measures that are more or less designed to directly enhance liquidity. The key items to observe for all
57 With UIOSI, a non-nominated PTR implies that the capacity effectively is sold in the market coupling, and the price spread is transferred to the PTR owner –
exactly as if the transmission right was an FTR.

measures are the perceived benefits, the costs related to developing and using the measure, if there are any
implementation complexities and if fairness or other concerns might lead to a negative conclusion.
This sub-chapter is structured such that we describe and analyse different measures in prioritised order in the sub-
sections below, with an aim to understand if they might have merit in the BiH market or not. We recommend the
measures discussed in first two sections, as well as a voluntary variant of the third measure (market making). We also
recommend considering the scope for reducing administrative requirements for market participants and to encourage
the use of standardised contracts. Obligations to offer or trade at the PX are not recommended, primarily because the
first two measures can achieve the same with less complexity and less administrative costs, particularly if the PX is
arranged with import and export zones until full market coupling is implemented (section 7.2).
7.3.1 Obligations to procure grid losses at PX

One of the simplest measures to enhance liquidity is to ensure network operators purchase energy to cover grid losses
daily via the PX. Currently, NOSBiH procures losses for the transmission network through the public procurement
system. When a PX is operational, it could be made mandatory for all network operators, not only the ISO for the
transmission network but also the distribution network operators, to procure network losses via the day-ahead market.
This requirement will continuously provide at least some liquidity on the buy side, which without doubt would be met by
offers from the supply side – like today, but in different market or procurement arrangements. The grid losses are
approximately 10 percent of the total gross consumption, i.e. a bit above 1 TWh per year. 58 The requirement will then by
itself ensure a 10 percent market share for the PX (somewhat higher during peak load and somewhat lower during off-
peak hours). This corresponds to approximately 20 percent of the volume needed to cover the PX costs, assuming fees
as indicated in Table 7-3 above.
An obligation to buy grid losses at the PX will make the cost of grid losses transparent, measurable and always
reflecting the market value of the lost energy. The value for the society at large of efforts to reduce network losses will
be equally transparent. The requirement might also be the basis for providing proper incentives for the various network
operators to reduce future network losses.
Such requirements are common in numerous European countries. The practical details differ; in some countries the
network operators are obliged to purchase the energy needed in the day-ahead markets, while in other countries they
are obliged to or may choose to use long-term contracts. However, as the forward contracting is increasingly done by
contracts that are settled financially rather than physically, the solution for grid companies are increasingly to procure
physically from the power exchange and potentially consider hedging the price risks by means of contracts for
differences (CfDs, see below).59
The cost of network losses will have to be covered, one way or the other, regardless what approach the regulators take.
Sourcing the energy from the day-ahead market implies always ensuring that the short-term prices in the electricity
market always reflect network losses and that network losses are always valued at market prices. Hence, this approach
minimises the socioeconomic costs of network losses, at least in the short term when the network structure is constant.
This implies that the measure itself is not associated with any other significant costs than the actual energy prices. In the
context of this study, in essence, this implies a free measure to provide at least some liquidity.
The costs of this measure are limited to the relevant PX fees and some administrative efforts to actually submitting the
bids and receiving the invoices etc. However, there are costs involved with the current approach to cover network costs
as well, and it is far from obvious that a requirement like this triggers higher total transaction costs. On the contrary, the
58 The amount of transmission losses for 2020 was 317 GWh and total cost of this service was 39,989,643 KM (EUR 20.446.305). Distribution grid losses were
913 GWh in 2020, corresponding to 9% of the total gross consumption,
59 Some will argue that this approach makes grid operators to market participants. The common practise is to submit price-independent bids for the expected
losses per hour. Regulators normally recognise that network operators then become market participants, but subject to both the same market behaviour rules
as normal market participants and to extra regulatory supervision to make sure that the trading activity is limited to buying the network losses.

costs might as well decrease. To the extent the PX price formation is efficient, the requirement also ensures that the
energy price for the losses always reflects the true, economic value of the lost energy. Depending on the efficiency of
the current sourcing of energy for network losses, the benefit can be significant. Assuming the energy cost per unit for
the transmission network’s losses is representative also for the distribution networks’ losses, based on the amount of
losses in 2020, the total energy cost for network losses in BiH is about EUR 80 million annually. Only a 1 percent
improvement thus has a value of close to 1 million Euro.
Conclusion
We highly recommend that all grid operators are required to procure network losses in the day-ahead market as soon as
this is operational. This will alone ensure a market share of the PX at 10 percent, or a turnover of at least 1 TWh.
Until then, it is conceivable to require distribution network owners to use a public procurement approach. As this typically
invokes higher transaction costs than simply buying from a PX, such a temporary requirement might require the use of
e.g. weekly or monthly contracts.
7.3.2 Contract for differences – converting existing contracts to volumes traded

at the PX
A contract for difference (CfD) is an efficient tool designed to manage economic risks associated with electricity
contracts. In a traditional wholesale contract, the seller is obliged to make an agreed volume available for the buyer,
while the buyer is obviously required to pay the agreed price (multiplied with the delivered volume). In a CfD, the seller is
obliged to ensure the buyer can purchase the agreed volume in the day-ahead market, regardless of the day-ahead
price, instead of expecting a delivery from the seller, and still have the agreed price as the net cost. The buyer would
physically purchase the volume for delivery at the PX. If the PX price turns out to be higher than the agreed contract
price, the seller will have to reimburse the buyer for the price difference (the red line in Figure 7-1. If the PX price is
below the agreed contract price, it is the buyer that will have to reimburse the seller for the price difference, as illustrated
with the green area in Figure 7-1.
Figure 7-1 CfD cashflow (Source: The World Bank (2016)). The top of the blue area represents the PX price. The
yellow line on top of the green area represents the agreed contract price, while the green area itself represents
what the buyer will have to pay to the seller. The red line represents payments in the opposite direction, from
the seller to the buyer.

While this carries a lot of benefits by itself, the side-effect on the PX market is also quite attractive. Converting from
conventional internal or bilateral contracts60 yields a liquidity boost to PX based day-ahead markets.
In the context of this study, a regulatory requirement or support to convert existing contracts to CfD structures can be a
strong measure to boost PX liquidity. This can be done without financial consequences for the contracting parties,
potentially except PX fees, while at the same time boosting the PX volume. The CfDs should be settled financially
against the BiH PX price (using this as reference price in the CfD). The physical volumes will then be sold and bought at
the PX, but the CfD will remove the exposure to volatile market prices as illustrated in the diagram.
The primary regulatory question is which contracts that should be exposed to such a requirement. A natural starting
point would be to ensure future internal and external contracts to public supply companies (supplying households and
other customers at 0.4 kV level) are CfDs instead of a traditional physical contract design. The scope might be extended
to all public procurement transactions. If all contracts for the public supply service are settled in this way, the PX
turnover will increase by approximately 6.5 TWh.
The second regulatory question is how such a conversion can be enforced. The options span from some sort of
voluntary arrangements, e.g. based on requests from the regulators, to sharp regulatory requirements, dictating how
EPs contract internally.
Note that the requirement does not affect the contract prices; the requirement concerns the delivery format only. The
procedures to determine the internal contract prices does not have to change. In competitive CfDs, the contract price will
naturally reflect the expected price level, corresponding to the yellow horizontal line in the diagram above. However, if
the contracting parties in the CfD prefer it different, they can agree on a quite different CfD price without any other
financial effect than the shape of the cashflow between buyer and seller. The PX may not know about the arrangement
at all.
This further implies that this measure cannot directly create any competitive pressure by itself. It is possible to arrange
the transfer to CfDs without any consequence for the resulting energy prices or volumes. However, it will likely increase
the market participants’ awareness of how they can benefit from the PX. It will also contribute to ensure that there are
always buyers and sellers available at the day-ahead market. Indirectly, this is likely to result in efficiency gains, e.g. in
terms of more efficient dispatch.
Support schemes for renewable energy are in many countries designed using similar principles, such that the RES
producer will sell the actual production at the local PX and receive a financial compensation, e.g. from the authorities or
the TSO/ISO, based on the achieved PX price and the detailed design of the support scheme. This approach
encourages RES developers to sell their production via the PX. However, regardless the design of a support scheme, it
is feasible to require that the beneficiaries actually sell their production at the local PX.
The administrative costs of this measure are quite limited. The efforts on the hand of the regulators is limited to
designing the rules and requirements. The contracting parties will potentially incur some one-time costs for the
conversion to a new ‘standard’. But to the extent internal contracts for supply to the public supply customers have a
limited duration (1 year or less), modification of existing contracts might be avoided. Changing both contracting and
delivery routines will, however, be necessary.
This will also imply that contracting parties must become members of the PX and incur normal PX fees. It is conceivable
that the EPs will anyway be PX members and be active on the PX market themselves. Also, the licensed traders that
are potential counterparts in public procurement will most likely be PX members anyway. Membership fees are then not
a relevant cost for this measure.
60 With direct, physical delivery and full payment from buyer to seller.

PX volume fees will likely increase the traders’ expenses. However, there are also administrative costs with the current
arrangements, which will be avoided. The net result can be a cost saving.
Conclusion
We highly recommend that existing contracts that involves incumbents. public procurement and public supply are
converted to a CfD structure as soon as a day-ahead market is operational. The objectives of the current contracts can
be maintained, potentially in a more efficient manner.
If applied to the supply of non-eligible customers, a CfD structure may result in as much as 6.5 TWh PX turnover, or a
market share of the PX at 60 percent. The share might even be higher if support schemes for RES require similar
arrangements (and are widely used).
7.3.3 Market maker obligations*

Market maker agreements or contracts is a widely used measure to secure liquidity on organised derivatives markets61.
When acting as a market maker, the market participant is committed to submit and maintain simultaneous buy and sell
bids for a given product and for a certain time interval. In continuous markets, such as intraday or forward markets for
electricity, these orders create a bid/ask spread in the market that creates trading opportunities for other participants. If
the market makers’ bids are out of sync with the other market participants’ valuation of the market, either the buy or the
sell bids will be accepted all the time. The market makers will then typically move the bid-ask spread down (if buy bids
are hit) or up (if sell bids are hit) to ensure their own exposure to the market is still limited. The benefit for other market
participants is that they will know that they can always sell or buy at (approximately) the offered price; they need not
worry too much about finding counterparts in the market if they are willing to accept the price. This makes it a very
powerful measure in markets relying on continuous auctions, like the forward market and, theoretically, continuous
intraday markets62, as well as in other commodity or currency markets.
Acting as a market maker comes with some risks. If the market maker is not sufficiently fast in moving the bid-ask
spread when prices change, e.g. due to lack of experience or expertise, there is a significant risk of developing a
negative portfolio value and induce significant losses. Market makers may not necessarily be entitled to refuse some
counterparts. Without sufficient clearing mechanisms or other measures to limit counterpart risks, the market maker
might end up with a rather risky portfolio with limited options to reduce the risks. Hence, market makers in the electricity
markets are normally well capitalised companies, often with significant production assets and well experienced trading
units. If the market making activity is limited to intra-day trading or the early phase of a PX, the risks are clearly much
smaller.
The potential costs of this measure depend to a large extent on the detailed requirements to the market maker. In
voluntary agreements, these are typically set so loose that the cost of being a market maker corresponds to the benefit
of reduced PX fees for the market maker. In forward markets that are so illiquid that it is not possible to attract voluntary
market makers, the power exchange must eventually pay significantly. If, alternatively, it is arranged for via regulation,
the costs will naturally be at least as high. Regardless if the regulator is prepared to cover the costs (e.g. financed via a
surcharge on network tariffs) or not covering the costs at all, mandatory market maker tasks will likely be a highly
controversial measure.
A market maker arrangement can potentially improve liquidity, but it can hardly reduce the market concentration.
Due to the nature of this measure, it is not widely used in discrete auctions like European day-ahead markets for
electricity. For discrete auctions, obligations to offer or to trade are essentially a parallel to market maker obligations in
61 A derivatives market is a market for long-term contracts, normally such that the product of an other market is the underlynig product. The long-term contract will
then typically be a financial contract fixing the price for the underlying product. CfDs are derivatives in the electricity market.
62 To our knowledge, none of the current continuous intraday markets in Europe have market maker arrangements.

continuous markets. Hence, if there is a concern for insufficient sellers (or insufficient buyers) at a day-ahead market
with discrete auctions, obligations to offer or to trade might be a more relevant choice.
For market maker obligations, the regulator would eventually decide the required bid-ask spread, potentially to be
differentiated across products (typically larger spreads for longer contracts), conditions for moving the spread up or
down, if exemptions apply, and if or to what extent the obligation is associated with benefits with regards to trading fees
or other forms of cost recovery.
Many of the existing power exchanges have voluntary market maker agreements for their forward markets. The
agreements specify minimum requirements for the bid/ask spread and conditions for moving the spread upward or
downward according to market signals. Some European PXs have had similar voluntary market maker agreements for
the day-ahead market as an introductory measure to ensure there are at least some buy and sell orders at the day-
ahead market already from the outset. Market makers are usually compensated for their service, typically with reduced
fees or other cost related reliefs with regards to trading at the power exchange.
For BiH, the questions are first if a market maker role is desirable for the PX and second if this should be a voluntary or
a regulated measure.
While we do not think there is a permanent need for a market maker in the day-ahead and the intraday timeframes in
BiH – there are already a number of generators, suppliers and traders, that potentially can compete – we also recognise
that there might be a concern initially that potential participants fear they will not be able to buy/sell at the PX at
reasonable prices and/or with a sufficient volume. Hence, we do think a market maker role would make sense,
particularly for the first months or year of operation. The natural candidates for such a role are the generation (and
wholesale trade) units of the three EPs. It may very well be that one or more of the EPs find that the market maker role
fits well with their overall market strategy.
Hence, we do not think this has to be a regulatory obligation. A voluntary approach is essentially simpler, more flexible,
and easier to adapt to changing market conditions and other changes. Furthermore, voluntary agreements solve the
issue about fairness and level playing field that typically would follow from regulatory requirements on some market
participants. Finally, if satisfactory voluntary arrangements can be made, the potential challenges of ensuring equal
regulation for similar market participants across the entities can be avoided. Otherwise, it would be important to ensure
an equal regulation across the entire country.
If, however, the PX fails in establishing voluntary agreements, we do not prioritise market maker obligations if the other
recommended measures are implemented (grid losses, CfD structure and import/export zones). It is worthwhile to see
first if these are sufficient measures before imposing regulatory requirements of this nature.
To what extent market maker obligations for a forward market is a relevant measure should be evaluated at a later
stage. Generally, we have a preference for voluntary arrangements, particularly if the market structure is sufficient to
anticipate fair competition.
Conclusion
While market maker arrangements are quite useful in forward markets, we do not consider market maker obligations as
a relevant measure for a BiH PX, neither in the day-ahead timeframe, nor in the intraday timeframe. As a regulatory
obligation it is too complex to be fit for purpose in the day-ahead timeframe, and it seems a rather theoretical idea for an
intraday market, at least until the potential interest for intraday trade is revealed. Hence, we do not prioritize market
maker obligations.
However, a new PX should seek to agree with the three EPs so they are committed to submit bids and asks in the early
phase of market. The aim is to ensure other participants will actually be able to sell or buy on the exchange. It seems
fair to believe this could be achieved with voluntary arrangements and without regulatory intervention.

When exchange based forward trading for BiH becomes feasible, the forward PX will most likely be looking for traders
that would assume a market maker role on a voluntary basis.
7.3.4 Reduce administrative barriers

Interviewees mentioned complex licensing and tax requirements as one of several reasons for decisions not to
participate actively in the current BiH wholesale market. They referred to requirements for legal and physical presence,
complex and often paper-based VAT routines, and limited use of electronic platforms for communication between
licensee and relevant authorities. Some also referred to administrative complexities pertaining to each individual
contract, such that the administrative burden was partly a function of the number of contracts and not only the
aggregated contract volume and value.
These are not unsurmountable barriers to entry. However, they are barriers, and as such it is always useful to consider if
there is scope for reducing these barriers, e.g. in terms of harmonising VAT rules applicable to energy and energy
contracts with those for the EU, moving towards digital solutions for reporting, etc.
The potential benefit of reducing such barriers are limited to increased probability that new entrants appear in the BiH
market, and perhaps also reducing administrative costs for existing market participants and involved regulatory bodies.
The process of reducing such barriers is in itself costly as it requires regulatory attention and resources, but the result is
often reduced administrative costs in the future (or scope to use administrative resources for other purposes than
checking compliance with VAT rules and other legislation).
Conclusion
The specific costs and benefits of reducing licensing and tax-related barriers cannot be evaluated further than this
without addressing specific regulatory requirements. However, it is not controversial to recommend to always watch for
scope for simplifying routines and reporting mechanisms, opportunities to harmonise with neighbouring countries and
adopt practices that are proven successful elsewhere. The costs of such improvements are small if they result in a more
competitive electricity sector.
7.3.5 Promotion of standardised contracts

Using a standardised wholesale contract is normally a voluntary effort by market participants. When all other conditions
than price and volume are the same, portfolio management and risk assessments are simplified, and transaction costs
are reduced. If the forward market is exchange-based, the forward contracts will normally be defined by the exchange
(and thus standardised). If the forward market is OTC, standardisation is ‘more’ voluntary and can be interpreted as a
market result.
The Nordic, the British and the Central West European forward markets started with bilateral contracts, often using a
neutral broker as an intermediary. Quickly, the most active traders agreed to using a fairly simple and standardised
contract, in which all details except price and volume where predetermined. The broker-based markets evolved to OTC
markets. Variants existed for baseload and one or more other profiles, while duration was standardised to e.g. whole
months or years. Using the standard was obviously subject to agreement by both parties and did not involve any further
transactions costs than those incurred internally by each party.
Currently, the most frequently used standardised contract in Europe is from the European Federation of Energy Traders
(EFET), in addition to the contracts issued by the forward power exchanges. In BiH, there is already some signs of a
standardised contract from at least one of the EPs – in their requests to other counterparts to buy or sell quantities for
shorter or longer terms, at least one of them typically prefer their own standard. Some international traders in the region
seem to prefer other standards than the EFET contract. However, all traders active in the western parts of Europe would
be familiar with the EFET contract.

If BiH stakeholders agreed on a standardised contract, not necessarily identical to EFET but preferably not very
different, it would have a favourable impact on administrative costs for wholesale market transactions. This can be
promoted regardless the status of a PX but would be obsolete when an exchange for forward contracts eventually is
operational. In the absence of a short-term power exchange, the contracts would naturally have physical delivery for
settlement. However, it would be useful to make sure that once a reliable short-term price is established, the contracts
could be settled financially as ordinary CfDs, while physical delivery will be arranged via the power exchange. The wider
impact of contract standardisation is thus a support to the role and importance of the power exchange, and to contribute
positively to both transaction volume and transparency. However, there is no direct impact on liquidity and competition
other than it contributes in the preferred direction.
The use of standardised contracts is generally also one of the firsts signs of an emergence of an organised forward
market. Standardised contracts are indeed forward contracts, and regardless the formal status of trading venues, the
contracts do form a forward market. There are ample examples in Europe where current organised markets, on
exchanges like EEX, Nasdaq and others represent the continuation of previous markets based on bilateral transactions
relying on EFET or other standards.
We cannot see any significant disadvantages of standardisation of contracts. In any case, special needs might be
addressed in separate and/or additional/supplemental contracts.
The administrative costs are also quite limited. There are already standards that could applied right away or with some
adaption to ensure the difference with contracts used in neighbouring markets are minimised.
Conclusion
While we highly recommend the use standardised contracts as soon and as widespread as possible, there is little scope
for regulatory measures to achieve this, except making sure state and entity regulations not unintentionally prevents
efficient use of relevant contracts.
7.3.6 Obligation to offer or trade at PX*

7.3.6.1 Obligation to offer at PX*
This measure aims to enhance liquidity at a PX by obliging incumbent and/or large producers to daily offer volumes for
sale in the day-ahead market at the PX. Several of the organised power exchanges in the Balkan region have or have
had, such requirements, and it is also seen globally, particularly for newly started PXs. The measure provides a simple
and efficient route to reduce barriers for new entrants and small actors to join the market if the case is that incumbents
are not offering at the PX.
The offers could be based on a maximum offer price at (discrete) day-ahead or intraday auctions or as bid/offer spreads
in continuous (or forward) markets. The level of the maximum offer price is a regulatory decision. The maximum offer
price is usually set to covering marginal (or variable) costs of production, eventually including a reasonable profit but still
so that offers are actually attractive for other market participants. In the case of BiH, this should ideally be a decision set
by SERC, or as a coordinated decision among all regulators. Otherwise, with different practices in different parts of the
country, the measure would be dysfunctional.
The regulators would also need to agree on the volume that must be offered. One approach would be to set the volume
so high that relevant concentration metrics improve sufficiently. The volume covered by the obligation would not be
considered as controlled by the incumbent.
The three large incumbents have a total production capacity of close to 4,000 MW. Ignoring the import opportunities, this
implies an HHI score of 2,900-3,000, depending on whether it is calculated based on energy (TWh) or capacity (MW).
However, considering also the import opportunity of approximately 2,000 MW, the HHI score drops to below 1,500, i.e.
below the threshold for a competitive market.

To bring the HHI significantly lower, e.g. to 1,000, the three incumbents would have to offer approximately 15 percent of
their installed capacity at the PX, at prices potentially attractive to others. And it would be necessary to combine the
requirement with strict regulation on who could purchase the offered volume if the aim is to mitigate market
concentration. Without it, the risk is that a fourth ‘incumbent’ is developed on basis of the three existing, without any
further impact on market concentration.
Even if a significant impact on market concentration is considered unlikely, the measure will improve liquidity on a local
PX. A requirement on the three incumbents to offer e.g. 10 percent of installed capacity may result in a PX volume of 1
to 1.5 TWh, which is significant and similar in size as making sure grid losses are purchased at the PX.
The important question for this measure is, however, if there will be sufficient buyers to pick up the offered volumes. 60
percent of the total consumption is subject to favourable public supply arrangements with prices lower than reasonable
estimates on wholesale costs (Miljević, 2020). The maximum offer prices will presumably have to take the real
wholesale costs into consideration, and then there is limited demand. Lower maximum offer prices will likely be
considered unfair and also incentivise inefficient utilisation of power plants.
The second question is about implementation complexity. Comparing with an obligation to purchase grid losses at the
PX, obligations to offer requires a lot more detailed intervention from the regulators. The regulators would need to define
and agree upon both the maximum offer price(s) and the principles for determining volumes.
We thus have serious doubts as to whether this measure has merit in BiH under the current circumstances. If the public
supply arrangements are redefined, such that retail prices are better linked to wholesale prices, the conclusion might
very well change. The administrative costs with this measure are moderate; it requires some analytical work and some
coordination among the regulators. It is complicated but far from impossible to determine reasonable price limits for such
mandatory offers. And with a more compatible approach for regulation of retail prices, there is likely to be an impact on
PX liquidity.
Bulgaria has implemented this measure to build liquidity in the PX market. Also, the legal framework in North Macedonia
and Ukraine includes the legal basis for imposing measures for mandatory participation in the PX.
Obligations to offer at a PX might be considered as a variant of regulated access or VPPs (see chapter 7.3) but tailored
to support liquidity at a PX. There is, however, at least one important difference: while regulated access and VPPs are
long term arrangements, typically one or several years, obligations to offer at a PX should be considered as a series of
consecutive short-term obligations. It allows for a more flexible approach to determining offer prices, which then might
be adapted as fundamental costs change over time.
Conclusion
While we do recognise the merits of this measure in principle, we are hesitant to recommend it for BiH. The regulatory
complexity is relatively high. Any liquidity improvements would depend on the relation between retail prices and
maximum offer prices. Unless retail prices are truly reflecting wholesale prices, we do not see or expect any significant
impact on liquidity or competition. To accommodate significant improvement of the market concentration, the volume to
be offered (and sold) should be in the magnitude of 10 percent of the current capacity of the three incumbents, resulting
in a PX volume of 1 to 1.5 TWh, and the offer price should not be above current retail prices.
7.3.6.2 Obligation to trade at PX*

Obligations to trade at a PX are to some extent comparable with obligations to offer, but with one important difference:
With obligations to trade, the concerned market participant(s) shall adopt bidding strategies that results in matching of
orders from other market participants. Matching with buyers belonging to the same vertically integrated group is
considered non-compliant with such requirements.

This measure aims to move energy from participant(s) with significant market power into the organised market,
increasing transparency and ideally also competition. An obligation to trade could be implemented for both the seller and
buyer side.
Given the nature of this measure, there is less need for regulatory intervention in determining ask or bid prices. Finding
the ‘correct’ prices would be a challenge for the concerned companies, not the regulators. As fulfilment of the
requirement will depend on finding counterparts with matching interests, the pricing is to some extent more market
based than with obligations to offer. In practice, a seller subject to this requirement will have to set the ask price so low
that the volume is actually sold. The ‘task’ for the regulators would be to determine the volume necessary to trade for
each of the concerned participants and to monitor compliance. This should eventually be a decision set by SERC, or as
a coordinated decision among all regulators. Otherwise, with different practices in different parts of the country, the
measure would be dysfunctional.
However, the potential merit of the measure is, like obligations to offer, related to the available opportunities for the
potential buyers. On the one hand, buyers will always find business opportunities if the purchase prices are sufficiently
low. On the other hand, if prices are so low that it enables buyers to outcompete current suppliers to retail customers,
the fairness of this measure will likely be challenged.
This measure is often used towards RES producers and as a condition for receiving a renewable energy market
premium or subsidy (see also section7.3.2). If day-ahead cross-border capacity is available only via a PX coupled with
other markets or if utilisation of transmission rights requires the use of the PX (i.e. import and export zones, section
7.2.1), this is essentially an obligation to trade power for cross-border exchange at the PX.
Conclusion
We have similar doubts about the merits of this measure as we have for obligations to offer. There is some regulatory
complexity, in particular to ensure similar regulatory practice across the country. Making sure the implementation is fair
also to incumbents is also a challenge. Finally, there are other, more cost-efficient and less controversial measures to
improve liquidity and thus transparency at the BiH PX; namely obligations to buy grid losses at the PX, widespread use
of CfDs and mandatory use of import and export zones until market coupling is in place.
7.4 Measures to improve liquidity and mitigate market power

The previous section addressed measures that potentially can enhance liquidity directly. A potential reason for low
liquidity at a PX is high market concentration, e.g. as a result of strategic behaviour. In this section we consider
measures that also aim to mitigate market power, with a potential side effect in terms of improved liquidity. Like in the
previous section, focus is on the day-ahead and the intraday timeframes, unless differently explained for each measure.
The key items to observe for all measures are the perceived benefits, the costs related to developing and using the
measure, if there are any implementation complexities and if fairness or other concerns might lead to a negative
conclusion.
Non-discrimination is generally a good principle, but we do not prioritise this in the context of this study. We would rather
recommend a reform of the public supply arrangements, see section 7.5. We are not recommending any of the other,
rather intrusive measures discussed below. However, they are presented in a prioritised order, such that the least
relevant measure is discussed last. We do recommend a closer look at licensing and tax requirements in order to
reduce the administrative burdens for market participants as well as concerned authorities.

7.4.1 Non-discrimination obligations*
Non-discrimination is a cornerstone of the European market reforms and also enshrined in the Energy Community
Treaty. While the principle is well recognised and widely used in regulation of different infrastructure sectors, it is useful
to evaluate two different forms of this principle separately.
1) Applied at retail level, or towards final consumption, it would typically reduce or prevent cross subsidization
between end consumers that are all customers of the same energy supplier and/or the same distribution
network company. This is the principle that is embedded in all EU electricity market regulation, in particular for
network companies: price differences between different customers of the same network company must be
based on different costs of providing services to these customers.
2) In the wholesale market, the aim, scope and impact would typically be different. There, a common
implementation principle would be to require dominant market participants to treat all wholesale market
players on equal terms, also undertakings not being part of e.g. the same vertically integrated entity that is
subject to such obligations. If a vertically integrated company (“A”) is subject to a non-discriminatory obligation
and sells internally to its affiliated supply company “a”, an independent supplier, “b”, would be entitled to
purchase on the same conditions and at the same prices as “a”.
The first principle is a good practice, normally not very controversial, and while widely accepted, it also has no or limited
impact on wholesale market efficiency, competition and liquidity. While this variant of the measure is out of scope for this
study, and thus not pursued further in this report, we highly recommend applying it wherever relevant, including in BiH.
It should be noted, however, that application of this principle alone in any case is not likely to have any significant impact
on the wholesale market. If customers of company “a” in the example above face two very different retail prices
depending on e.g. their legal status (household vs. small commercial customer), ending this practice would not impact
customers of company “b”, or improve the contracting opportunities for “b” in the wholesale market.
The second principle is, on the other hand, likely to have merit in wholesale markets where the concentration is high,
and the market share of the incumbent producer(s) is high. If adequately enforced by all the regulators, the measure
reduces the incentives for companies like “A” to sell cheap to “a” so that “a” can maintain a high market share in the
retail market. “b” would automatically be entitled to similar purchase prices as “a”, and then ultimately, “A” would
subsidise the market share of a competitor in the retail market.
But based on this simple example, we can also conclude that the main impact will first be visible in the retail market. It
would ultimately incentivise an end of the current practice of public supply contracts well below wholesale prices. It will
further incentivise independent suppliers to become active in the retail market and thus indirectly increasing liquidity of
the wholesale market over time too. The example also holds for industrial, deregulated customers. It may also provide
incentives for distributed energy resources, like rooftop solar, as they appear more cost competitive.
The administrative costs of enforcing the second principle are quite limited; the cost comprises monitoring and control at
the hand of the regulator. However, as the most immediate effect would likely be observed in the retail market and there
might be other, more direct means to improve the efficiency of the retail market (reform of the public supply
arrangements), we do not prioritise the second principle. If an end of the current public supply arrangements is
desirable, the easiest would of course be to change the rules and the implementation of the public supply obligations.
Conclusion
Introducing and enforcing non-discrimination obligations for all network operators is highly recommended. Enforcing
non-discrimination obligations on the three major groups (EPs) is not prioritised now – it would be better to reform the
public supply arrangements such that retail prices are not systematically below what appears to be the wholesale prices.

7.4.2 Self-supply restrictions*
Self-supply restrictions are typically implemented as an obligation for vertically integrated companies to purchase a
portion of the energy they need for delivery to customers in organised market(s). Alternatively, it can be implemented as
a restriction in how a public supply company can contract energy for delivery to its customers. Public supply companies,
currently purchasing power internally in vertically integrated companies, will be forced to move to external contracting,
e.g. from a PX and/or bilateral or forward contracts.
This measure can contribute to larger PX volumes, increased price transparency and potentially increased competition.
It could be a useful tool towards unbundling and increased competitive behaviour in BiH, in particular as a first step for
breaking the full supply within vertically integrated utilities.
While the simplest option to implement is a complete self-supply restriction, a less intrusive approach would be to set a
maximum self-supply share per month. In this way, liquidity could be channelled into the organised market creating a
feasible starting point to attract further liquidity increase.
This measure requires an organised market and that self-supply restrictions are enforced by the BiH state regulator
SERC or in a coordinated effort by all three regulators. This seems to require new or modified legislation in BiH and the
entities. It seems to go beyond the Energy Community law.
The British regulator, Ofgem, has experienced high compliance and monitoring costs with self-supply restrictions
(Energy Community Secretariat, 2019).
From a utility perspective, this measure would expose the (public) suppliers to market risk (although fairly limited) and to
a daily market participation activity. The latter would imply a larger awareness of opportunities in the short-term market.
While not literally preventing cross-subsidies, self-supply restrictions can make the cost of such subsidies clearer to both
internal stakeholders in the electricity companies and to regulators.
However, there is nothing that suggests self-supply restrictions can reduce the concentration in the market. The energy
production that cannot be sold internally, can of course be sold externally. And similar quantities must be purchased
externally, while the actual market shares in generation and retail sales will be maintained, in particular if there is a PX in
operation. Not even a complete self-supply restriction will change the concentration metrics – unless the separation
between sale of production and purchase for supply leads to more efficient dispatch and this results in shifting of market
shares.
The impact on PX liquidity will be a straightforward function of the details of the self-supply restrictions. A requirement to
purchase a certain share externally on a monthly basis will at most increase the PX volume by the corresponding
volume. But here we have to bear in mind (i) that the restriction can be complied with by purchasing a bilateral monthly
contract from another utility (outside the PX), and (ii) that the generator associated with the supplier in the example not
necessarily will sell the ‘lost’ internal volume on the PX. This generator might also consider a bilateral contract outside
the PX.
Conclusion
We do not recommend this measure. It does not cater for any reduction in the market concentration and it fails to ensure
increased PX volumes. It can contribute to increased transparency and awareness of opportunities in the short-term
market, but that applies to most of far less intrusive and much easier to implement measures aimed at directly
enhancing the PX liquidity.
7.4.3 Virtual power plants*

In the context of this study, Virtual Power Plants (VPPs) are regulated long-term (e.g. one or several years) volume-
based mechanisms, which only set the volumes of the regulated product and allocate the product to those who value it

most, thus allowing the discovery of the product’s market value. The regulatory aim is generally to limit potential market
power. The contracts are designed so as to mirror the real cost and operational characteristics of actual power plants. A
common structure is that there is a market based fixed price for the contract (mirroring the investment, determined in the
VPP auction) in combination with predetermined prices or price formulas for variable and semi-variable costs. The
variable costs could be linked to e.g. fuel prices or other indices.
An important question is who would purchase VPPs. The potential business opportunities for the buyer are to export,
sell to the large, competitive customers or the low-voltage customers benefitting from the public supply obligations. As
the latter category essentially enjoys subsidised prices, only the two other remains realistic.
VPP requirements are typically placed on generators with a dominant position, so as to ensure their incentives to abuse
of market power are limited. VPPs reduce the concentration in the market. The HHI calculations in section 7.3.6
suggests that the concentration is already below the threshold for a competitive market. Selling 400 to 600 MW as VPPs
would bring the score below 1,000.
Regardless if VPPs are designed as CfDs or as a traditional physical contract, they would strengthen the incentives of
incumbents to make (more) competitive dispatch decisions. One reason is that the incumbents’ potential benefit of
suboptimal dispatch would decrease, and the costs of such behaviour would increase: if e.g. an incumbent would
consider to reduce his own output in an attempt to raise PX prices, he would also make it more profitable for the VPP
buyer to use the VPP and sell at the (higher) PX price. Another reason is that a competitive VPP buyer will presumably
strive to use (“dispatch”) the VPP in the most profitable way. This could inspire the VPP seller to look for improvements
in his own dispatch strategy.
As the VPP contracts primarily have financial features, they allow the owner to retain physical management and control
of the plant, while leaving the decision about which volumes to make available in short term markets to the VPP
buyer(s). Hence, VPPs represent a “virtual divesture”, avoiding physical sale of assets by dominant undertakings. It is
often used or considered to remedy competition concerns in merger cases.
When coordinated with the organization of a day-ahead market, VPPs can contribute to enhanced liquidity on the
exchange and transparency of the wholesale market. These benefits can be enhanced if the VPPs are designed as
CfDs (see section 7.3.2).
VPP design – setting parameters for size, profile (peak/off-peak, etc.) and duration – is generally considered as a
complex regulatory task, and usually involves consultation with competitors of the dominant firm. Monitoring compliance
during the delivery may partly be taken care of by buyers – the probability that regulatory attention is needed if an
independent buyer is satisfied is relatively low. In order to avoid unintended discrimination among the three incumbents,
the regulation must either be set by SERC or in coordinated decisions by all three regulators. In several countries, also
the competition authorities have had central roles in implementation of VPPs – often in close cooperation with the
energy regulator.
Like for a number of other measures providing third parties access to resources held by the incumbents in different
ways, a requirement for success is that the access is valuated. If the cost of access is set higher than what could create
profit opportunities for export or sales to competitive or privileged customers, buyers will likely not make use of the
measure. What makes VPPs potentially attractive is that the fixed VPP price is typically set in an auction. Then it is to
some extent up to the potential buyers to ensure there is a benefit for them. One can therefore assume that VPPs carry
a higher probability for success than regulated access.
The implementation and monitoring costs for VPPs are significantly higher than for obligations to offer or trade, in
particular at the side of the regulator.
Conclusion
We are not recommending a mandatory sale of VPPs. The market concentration in BiH is already moderate. There is

already not only one, but three relatively large incumbent market participants (the EPs) and one large, independent
producer. Imported energy is readily available. The HHI is just below 1,500 when taking the import opportunities into
account. To accommodate significant improvement of the market concentration, the volume to be offered should be in
the magnitude of 10 percent of the current capacity of the three incumbents, and the offer price should not be above
current retail prices. Any liquidity improvements would also depend on the relation between retail prices and maximum
price limits. As the BiH market seems to have retail prices well below wholesale prices, it is not clear that VPP
requirements will have significant merit in the wholesale market now. If, or when, retail prices are reasonably reflecting
wholesale market prices, it is not apparent that a VPP contract will solve any concern or challenge for new entrants (see
also the discussion in section 7.4.5.
7.4.4 Direct trading obligations*

Direct trading obligations usually require incumbents to offer wholesale energy contracts to (small) suppliers without own
generation assets on non-discriminatory terms. Currently, there are few, if any, such suppliers in BiH. The measure
would thus potentially pave the ground for new entrants, in the form of new BiH companies acting as suppliers or
existing suppliers elsewhere starting business in BiH.
The aim is generally to ensure small actors and new entrants have fair access to energy for further supply to their
customers, but it may also be reversed and provide small producers a route to market their output.
When eligible buyers (e.g. small or new entrants, without own assets) send a request to trade, the incumbent would be
obliged to respond with a quote (price, other conditions) and a reasonable limit for the buyer to eventually accept the
proposal. Typically, the volume, the profile and the duration must be within some regulated limits.
• The crux of the obligation is that the incumbent offers prices and other conditions as good as the best offer he
provides to other counterparts, including internal customers in vertically integrated structures. As noted for
other measures, notably obligations to offer or trade at a PX (see section 7.3.6, the current practise of lower
end-user prices than anticipated wholesale prices cast doubts as to whether someone will accept such offers.
• Profile and duration must be set such that it makes sense for the buyer. Offering one-day contracts to a
supplier looking for long-term solutions on behalf of his customers will certainly not be very helpful for the new
entrant and thus violate the basic idea with the measure.
• Determining the volume, the relevant regulatory authority should consider how large the volume should be in
order to accommodate material changes in the market concentration. As explained in section 7.3.6, it might be
sufficient if the trading obligations are limited to 10 percent of the existing capacity.
• In this context, the relevant regulatory authority is either SERC or all three in joint decisions.
Direct trading obligations can be applied with and without reference to organised markets. If an organised day-ahead
market exists, it would be natural to require that direct trading obligations are designed as CfDs with reference to the
local day-ahead price (see section 7.3.2. If there is an organised forward market, the trading obligations would
presumably take the form of a requirement to offer one or more of the contracts already traded in this forward market.
The potential benefits of direct trading obligations would then, in addition to reduced concentration, be increased
volumes in the wholesale market and potentially stronger incentives to making sure dispatch decisions are efficient.
Whether this measure results in increased transparency depends on if there is a PX or not. If implemented in the
absence of a PX, transparency about volumes and prices must eventually be ensured in the detailed regulation obliging
incumbents to trade, e.g. such that contract details are collected, monitored and reported (in aggregated form) by the
regulator.

The Energy Community Secretariat points out the enforcement challenges: “as it would be (i) difficult to identify
breaches, and it may be (ii) difficult to monitor compliance. This mechanism provides access to products, but (iii) it may
not promote overall liquidity in the wholesale market (at least not on its own, or until it has led to a substantial growth in
small supplier market share).”63
Conclusion
While this in principle is an interesting measure, we are not recommending it. The market concentration in BiH is already
moderate. There is already not only one, but three relatively large incumbent market participants. Imported energy is
readily available. The HHI is just below 1,500 when taking the import opportunities into account. To accommodate
significant improvement of the market concentration, the volume to be offered should be in the magnitude of 10 percent
of the current capacity of the three incumbents, and the offer price should not be above current retail prices. Any liquidity
improvements would also depend on the relation between retail prices and maximum price limits. As the BiH market
seems to have retail prices well below wholesale prices, it is not clear that VPP requirements will have significant merit
in the wholesale market now. If, or when, retail prices are reasonably reflecting wholesale market prices, it is not
apparent that direct trading obligations will solve any concern or challenge for new entrants (see also the discussion in
section 7.4.5.
7.4.5 Regulated access*

Regulated access typically aims to extend access to ‘national’ resources beyond dominating, incumbent actors, by
granting other market participants access to a specified volume of electricity at a regulated price. The general idea is to
ensure new entrants and small actors can also benefit from access to similar resources that incumbent producers do.
The French ARENH mechanism (Accès régulé à l’énergie nucléaire historique) is a classic example in which the French
incumbent EDF is obliged to offer 100 TWh of its nuclear production (corresponding to 25 percent of its general
production) to competitors, at a regulated price.
Successfully applied and in the ‘right’ circumstances and context, regulated access can indeed contribute to improved
competition and liquidity. One potential impact of this measure is increased volumes traded in the wholesale market,
particularly in transparent markets. This can be ensured if regulated access is implemented such that the volumes are
released via the power exchange. In such cases, the contract between the buyer and the incumbent can have a
‘contract for differences’ structure (CfD, see section 7.3.2), so that there is a financial settlement between buyer and
seller only, and physical delivery is arranged via the power exchange.
Another potential impact is reduced concentration of the market. Even if access contracts were designed as CfDs, they
would strengthen the incentives of incumbents to make (more) competitive dispatch decisions. The incumbents’
potential benefit of suboptimal dispatch would decrease, and the costs of such behaviour would increase.
However, there are some major prerequisites that must be in place:
1. There must be a ‘national’ resource for which to regulate the access. In the case of France, the fleet of nuclear
power plants was developed prior to deregulation and it was considered to provide EDF with significant
economies of scale that could not (easily) be ‘repeated’ by existing actors or new entrants in France. In BiH,
the incumbents have access to their own coal mines, but it is not clear that regulated access to either the coal
mines or the coal-fired power plants will be considered beneficial. There is a global and well-functioning market
for coal, and the competitiveness of coal plants is questionable given the EU policies of future emission
regulation and carbon border adjustment mechanisms64. Also, ownership is not central as in France, and
application would have to be even between to the two entities/owners.
63 https://www.energy-community.org/dam/jcr:6bb112a3-526e-4ebf-b265-84d6b392241c/PG_01_2019_ECS_WM_EL.pdf
64 A carbon border adjustment mechanism would place a carbon price on imports of certain goods from outside the EU, in order to push EU partners to raise their
climate ambition and reduce the risk of 'carbon leakage.

2. There must be a benefit of the measure such that existing actors starts behaving differently and/or new actors
enter the BiH market. This implies that the regulated price must be sufficiently low to yield potential profit for the
buyers in the mechanism. The relevant potential profit opportunities are to export when production costs (or
access prices) are lower than the prices in neighbouring countries, or to increase sales to domestic customers.
However, there is already ample export activity, and consumers typically enjoy public service prices or
competitive prices already. The regulated access price must presumably reflect actual costs. In BiH, this is
likely to imply that while the regulated price might be competitive relative to prices in the day-ahead markets in
the region, the regulated price will likely be higher than the prices charged to households and other relatively
small consumers.
Determining the regulated prices is a delicate and complex matter for the regulatory authorities. The regulated prices
must be high enough to be fair against the three incumbent players while sufficiently low to be attractive for the buyers,
cf. point 2 above. In the French ARENH mechanism, the prices were in some years set so high that demand was below
the volume reserved for the measure.
Unless this measure is combined with a reform of the public supply arrangements and retail prices better reflecting the
wholesale market prices, it is questionable if buyers are sufficiently attracted (unless the prices are set so low that
purchase for export is clearly profitable). It is conceivable to implement a regulated access regime also in the absence of
a power exchange, but then is not clear how the measure will impact transparency and liquidity of the BiH wholesale
market. The potential benefits are thus larger if a PX is already in place.
While the impact on dispatch decisions and efficiency gain are hard to quantify, the potential impact on market
concentration is estimated. HHI calculations suggest that the concentration is already below the threshold for a
competitive market. The HHI is just below 1,500 when taking the import opportunities into account. Selling 400 to 600
MW under a regulated access regime would bring the score below 1,000.
Conclusion
As the measure is primarily addressing (potential) cost advantages of incumbent players, and the existence of such
advantages is questionable, we do not recommend regulated access for BiH.
With the current regulation for the supply to residential customers, it does not seem likely that regulated access will
increase competition, efficiency and liquidity of the market, beyond what could be achieved with much simpler
measures, as seen from a regulatory perspective. The efficiency is thus questionable.
When or if the public supply arrangements are modified such that retail prices are somehow a function of wholesale
prices, there will be some merit in this measure as well as in several alternatives. However, few, if any, of the
alternatives seem more complex to design and regulate properly. Hence, if needed, direct trading obligations or VPPs
should be considered before regulated access.
7.4.6 Termination of bulk supply contracts*

Long-term bulk supply contracts in vertically integrated company structures is common in markets with one major
incumbent. Often, such arrangements are formalised ahead of deregulation processes, as an attempt to avoid the
expected competition. Where such contracts or contractual obligations exist, regulatory intervention to terminate the
contracts will likely have merit and contribute to increased transparency and liquidity in the wholesale market.
However, our understanding of the BiH market is that there are no bulk supply contracts preventing producers or
suppliers from further trading. There are indeed internal contracts between the production units and the retail sales units
within each EP, but the existence of these contracts does not prevent EPs to offer in the wholesale market. It is thus not
clear which contracts that eventually should, or could, be terminated. The contracts agreed upon under the public

procurement law are typically limited in time and are subject to a competitive mechanism, while bulk supply contracts
typically are the remains of previous regulatory regimes.
As the vast majority of end users pay less than the wholesale price for its energy, the key concern for independent
suppliers or producers is not access to energy, but access to customers that might be willing to pay at least the
wholesale price.
Thus, one way or the other, retail prices should be harmonised with wholesale prices. The important regulatory question
is whether that is easiest done by terminating internal contracts within the EPs, or by modifying the regulation pertaining
to the public supply obligations. If the chosen method was terminating the internal contracts, the EPs might still respond
by facing a financial loss in their sales companies, instead of having stressed financial situation in the generation units.
Rather than such an indirect route to ending the subsidies to retail customers, we recommend this is addressed directly
by examining the public supply regulation and arrangements.
Conclusion
Introducing and enforcing termination of bulk supply contracts is not prioritised. It is better to address the pricing in the
retail market segment directly, e.g. via the rules for public supply.
7.5 Market access and other reforms for captive customers

As written in other parts in this report, the BiH public supply arrangements have the effect that retail customers enjoy an
electricity price below what we might expect the wholesale prices would be. There are indeed some measures that
potentially could make it more complicated for the EPs to continue the current practice. However, market participants
can often develop workarounds such that the impact of these measures in reality is quite small. Hence, it would be
better to reform the public supply arrangements directly, such that retail prices are not systematically below what
appears to be the wholesale prices.
Such a reform is desirable from an efficiency point of view and can be done without creating challenges related to
fairness and energy poverty. Exactly how that should be done falls out of scope of this analysis. But successfully done, it
will automatically increase the liquidity and the competition in the BiH market.
However, we should underline that such a reform is not a necessary condition for the recommendations in this report;
they are all applicable on a stand-alone basis. But with a reform of the public supply arrangements, the impact of the
recommended measures can be even more significant.

8 PX-BASED SHORT-TERM MARKETS IN THE REGION
Neighbouring countries to BiH have all established or are in the process of establishing a local power exchange. Croatia
launched its power exchange CROPEX in February 2016, Serbia launched its market in 2014 and Montenegro is in the
process of procuring a service provider to deliver and operate a local trading platform. Bulgaria established its power
exchange IBEX in January 2016. The Hungarian exchange HUPX takes part in the market coupling covering Czech,
Slovak, Hungarian and Romanian markets, a market coupling known as the 4M MC. All of the 4M MC countries run their
own local PXs and are participating in the region’s market coupling. There is a firm plan to couple the 4M MC region with
the EU single day-ahead coupling (SDAC) in the near future.
The market offering provided by the region’s local power exchanges are typically in line with the EU target model. The
main features of the target model are a day-ahead auction for balancing the overall supply and demand in the market,
establishing a reference price for the short-term cost of electricity. In addition, an intraday market is also usually
provided as a compliment to the day-ahead market, to serve as a tool for smaller adjustments of a participant’s position
before the delivery period starts. A few of the local power exchanges have also established OTC platforms / centralized
markets for bilateral contracts to facilitate a more efficient long-term trading and increase transparency.
The EU target model and market directives foresee that all EU countries shall be operating as part of the EU internal
market coupling, hence all of the established local power exchanges need to operate systems that are compatible with
the specification and requirements of the EU market coupling. On top of this, regulations such as REMIT and the EU
transparency regulation will require reporting of trading data and other activities that a trading platform needs to comply
with.
Due to these requirements set by the EU target model, many of the small local power exchanges have chosen to team
up with one of the big European PXs to secure compliance with the EU target model and to reduce implementation time,
cost and complexity. This PX business structure is called a “serviced PX”, where the local power exchange will be
managing local market participants, managing clearing services and other market development activities. The service
provider of the trading infrastructure will be responsible for delivering systems, technical support, market calculation
(prices, volumes, and flows) and market coupling services. Table 8-1 summarizes the region’s local markets and their
business setup. In some instances, the service provider is also part of the ownership structure of the local power
exchange. As can be seen in the table, the local power exchanges have all chosen to procure trading services from an
external service provider.

Table 8-1 Overview of established power exchanges in the region
Country Name Market Market Service Part Implemented measures to improve
offering operation provider of EU liquidity and competitiveness
and trading SDAC?
platform
services
Croatia Croatian Day-ahead External Nord Pool Yes • Market coupling
power (7 TWh provider - • TSO buy grid losses at PX
exchange 2020) Serviced PX • Market makers
Ltd • REMIT introduced
(CROPEX) Intraday • Market monitoring and
Guarantees surveillance
of Origin
Auctions
Bulgaria Independent Day-ahead External Nord Pool Yes • Market coupling
Bulgarian (15 TWh provider - • TSO buy grid losses at PX
Energy 2020) Serviced PX • Market makers
Exchange • Market monitoring and
EAD (IBEX) Intraday surveillance
• REMIT introduced
BC (OTC) • Forward market (OTC)
platform
Serbia SEEPEX Day-ahead External EPEX No • Pursuing market coupling
(3 TWh provider - (shareholder) • TSO buy grid losses at PX
2020) Serviced PX • REMIT introduced
Hungary Hungarian Day-ahead External EPEX Yes • Market coupling

Power (25 TWh provider - • TSO buy grid losses at PX
Exchange, 2020) Serviced PX • Market monitoring and
Company surveillance
Limited Intraday • REMIT introduced
(HUPX)
Romania OPCOM Day-ahead Independent - Yes • Market coupling
23 TWh PX • TSO buy grid losses at PX
(2018) • Market monitoring and
Intraday surveillance
Centralized • REMIT introduced
market for • Forward market (OTC)
bilateral
contracts
Green
certificate
Czech Republic OTE Day-ahead External EPEX Yes • Market coupling
23 TWh provider - • TSO buy grid losses at PX
(2020) Serviced PX • Market makers
Intraday • Market monitoring and
surveillance
• REMIT introduced
Slovenia BSP Day-ahead External EPEX Yes • Market coupling

SouthPool 8 TWh provider - • TSO buy grid losses at PX
(2020) Serviced PX •
Intraday • Market monitoring and
Long-term surveillance
auctions • REMIT introduced

Table 8-2 Overview of power exchanges currently being set up
Country Name Market Market Service Part Implemented measures to improve
offering operation provider of EU liquidity and competitiveness
and trading SDAC?
platform
services
Montenegro Montenegrin Day-ahead External Tendering No
Not yet Power Intraday provider - for selection
launched! Exchange - Serviced PX of a service
MEPX provider.
(BELEN)
Albania/Kosovo Albanian Day-ahead External Tendering No -
Not yet Power Intraday provider - for selection
launched! Exchange Serviced PX of a service
(ALPEX) provider.
North MEMO Day-ahead External Tendering No -
Macedonia provider - for selection
Not yet Serviced PX of a service
launched! provider.

9 CONCLUSIONS AND RECOMMENDATIONS
The present report provides a comprehensive analysis of the BiH electricity market, based on previous reports and
literature, interviews with stakeholders, market participants and regulators, numerical and economic analyses, and
intensive discussion with the World Bank team.
In short, we find that the BiH market has scope for improved efficiency. There are 3 large producers and vertically
integrated companies, some smaller producers, significant cross-border capacity and a growing interest in developing
renewable energy sources. Model based analyses of historic dispatch have identified a scope for further efficiency
improvements; the analyses indicate a potential gain of approximately EUR 60 million per annum. From the
qualitative parts of our analysis, it seems clear that most of this efficiency potential is due to insufficient short-term
trading opportunities, lack of transparency and relatively high transaction costs. This implies that for the producers, it is
often a rational decision to ignore short-term changes in generation costs and opportunities, and instead produce
according to plans.
The crucial question is how to translate this potential to real values for BiH. Three important features of the BiH market
must be observed:
• There is not yet any short-term power exchange in BiH. Short-term trade is thus based on bilateral transactions
and public procurement principles.
• The electricity generation in BiH is far less concentrated than in other countries in the region. Hence, the scope
for efficient competition is far better than elsewhere. This has significant implications for the choice of
regulatory measures.
• Households and other customers at the low-voltage network level seem to benefit from prices below the
wholesale value of electricity. This makes it virtually impossible for new entrants to enter the market and
increase the competitive pressure from that angle. It also encourages inefficient use of electricity.
One measure can be recommended immediately, without extensive considerations: BiH should arrange for a local
power-exchange for day-ahead and intraday trade as soon as possible. Assuming this comes in place, we further
recommend some measures to ensure the PX will have good liquidity already from the start:
• Agreements with incumbents to submit bids and asks in an early phase (voluntary market maker
agreements)
Market makers ensure that other participants will actually be able to sell or buy on the exchange. For a new
PX, it is particularly important to be able to convince potential participants that the PX is a real trading venue,
as it will have no track record that speaks for itself. A common practise among PX operators is to negotiate
voluntary deals with incumbent firms committing the latter to ensure other participants will actually be able to
buy or sell.
• Encouraging or obliging network operators to purchase energy for network losses on the PX
Network operators are regulated entities and will anyway have to ensure the energy for network losses is
purchased somewhere. As network losses typically amounts to approximately 10 percent of the total energy
consumption, daily purchase orders from network operators will ensure potential sellers that there is at least
some demand at the PX. If/when the PX price is efficient, the societal cost of purchasing energy for losses at
the PX is zero.65 By this measure alone, the PX will have a turn-over of at least 10 percent of demand.
• Ensuring cross-border trade pass through the PX

Most European PXs are coupled, meaning that cross-border trade to a large extent is ‘flowing’ through the PXs.
This facilitates efficient trade and adds to the liquidity of each PX. However, coupling arrangements are
complex, involves a lot of parties and take time to implement. But parts of the benefits of coupling are within
65 The alternative is not to not purchase losses, but to purchase the energy somewhere else. Hence, there is anyway a societal cost for energy losses.

reach even before negotiations with neighbouring countries have started. By requiring owners of transmission
rights in or out of BiH to sell and buy the necessary energy at the local PX, there will be a natural boost of
liquidity. This will effectively imply a major share of bilateral contracts will pass through the PX, and thus ensure
a significant turnover on the PX, approximately corresponding to 50 percent of demand, but depending natural
variations in import and export due to e.g. changes in the hydrological situation, fuel prices and demand.
• Ensuring wholesale contracts for suppliers under the public supply arrangements pass through the PX
With the current regulation, the ‘public’ suppliers receive power within their vertically integrated company or
group, or contract from other producers in regular auctions, in which prices and volumes are determined. The
result is internal or external bilateral contracts. If regulators required that such contracts must use the PX for
the physical fulfilment of such contracts, it would be a significant contribution to liquidity at the local PX. It would
not imply different prices for the electricity. The public supply concerns approximately 50 percent of domestic
demand.
These are all relatively simple and low-cost measures, not directly intervening with the preferred contract strategies of
the incumbents, but still quite powerful. They require a reasonable level of consensus among regulators and lawmakers;
different implementation in different parts of the country would like cause unintended results and differences across the
country. Implementation and monitoring costs with these measures are relatively low. Obligations to purchase from a
power exchange will not increase energy costs unless producers refuse to offer. As the market concentration is not
higher than it is, such refusals would impose economic losses to the producers and are therefore not very likely. In
addition, an obligation to ensure all cross-border trade has to pass through the PX means that there is always an import-
based opportunity at the PX.
Two types of impacts are expected from the introduction of these measures. First, these measures can quickly ensure a
turnover at the power exchange approximately at the same level as the domestic consumption. This increases the
probability for new entrants that they can always buy or sell at a BiH PX unless they require unrealistic prices. Ensuring
new entrants have fair options is important to attract new investments in renewable power generation.
The second result is the indirect effect of improved short-term trading opportunities, particularly for generators, with
lower transaction costs, more transparency about prices and better overview of alternative trading and generation
opportunities. With a liquid PX with sufficient turnover, both buyers and sellers will gradually have better options to
optimise power plants and consumption separate from their long-term contracts. The current indications of inefficient
dispatch will be more visible to the owners, and, at the same time, the opportunities to improve will be clearer and more
available. Over time, this will also contribute to reducing the barriers to entry for investors in e.g. renewable energy, as
the potential costs due to intermittency and forecasting errors will be more transparent.
Due to the expected benefits of such ‘light’ measures, we do not see the need to recommend any of the ‘traditional’ and
heavy-handed regulatory measures, such as virtual power plants, direct trading obligations, regulated access to
incumbents’ resources, self-supply restrictions and termination of bulk supply contracts often used in deregulation (or re-
regulation) of electricity markets.

10 REFERENCES
Allaz, B., & Vila, J.-L. (1993). Cournot Competition, Forward Markets and Efficiency. Journal of Economic Theory, 59(1),
1-16.
Energy Community Secretariat. (2019). Policy guidelines on increasing competition and liquidity of wholesale electricity
markets, including power exchanges.
Energy Community Secretariat. (2020). Annual Implementation Report 2020.
Energy Community Secretariat. (2020). WB6 Energy Transition Tracker 07/2020.
Energy Community Secretariat. (2021). WB6 Energy Transition Tracker 02/2021.
Green Policy Center. (2021). Carbon neutrality in the Energy Community – Drivers and policy proposals.
Le Coq, C., & Orzen, H. (2006). Do Forward Markets Enhance Competition? Experimental Evidence. Journal of
Economic Behaviour & Organization, 61(3), 415-431.
Miljević. (2020). Investments into the past. The Energy Community.
Munthe, K. L., Sandsmark, M., & Tennbakk, B. (2007). Is there a scope for exploiting the interplay between physical and
financial electricity markets? Working Paper 2007:4. Mole University College.
Murphy, F., & Smeers, Y. (2012). Withholding Investments in Energy Only Markets: Can Contracts Make a Difference?
Journal of Regulatory Economics, 42(2), 159-179.
The World Bank. (2016). Bulgaria Power Sector: Making the Transition to Financial Recovery and Market Liberalization.
Other sources
https://www.epbih.ba/eng/page/customers-and-electricity-market
https://cms.law/en/int/expert-guides/cms-expert-guide-to-electricity/bosnia-and-herzegovina
https://www.derk.ba/en/trziste/trite-u-bih
https://www.usaid.gov/bosnia/news-information/fact-sheets/fact-sheet-energy-policy-activity-bosnia-and-herzegovina
https://www.usaideia.ba/en/activities/electricity-retail-market/electricity-sector-in-bosnia-and-herzegovina/
https://www.europarl.europa.eu/RegData/etudes/BRIE/2016/593519/EPRS_BRI(2016)593519_EN.pdf
Analysis of electricity investment strategy for Bosnia and Herzegovina; Energy Strategy Reviews
Report on ancillary services and balancing market operations in Bosnia and Herzegovina for 2020

APPENDIX A
Basic competences for the entity regulators
FERK’s basic competences within the electricity sector

1) Supervision and regulation of relations between production, distribution, supply and electricity customers,
including electricity traders, in accordance with the Law on Electricity in the Federation of Bosnia and
Herzegovina and FERK implementing acts,
2) Supervision of the electricity market,
3) Adoption of methodology and criteria for determining tariff rates for non-eligible customers, implementation of
adopted methodology and supervision over application of tariff rates for non-eligible customers, as well as
adoption of methodology and criteria for determining prices of public supplier services, duration of public
supplier service and supervision of application of the price of the public supplier's service,
4) Adoption of methodology and determination of tariff rates, terms and conditions for the use of distribution
systems.
5) Granting consent to the public supplier on the established tariffs
6) Adoption of the methodology for determining the fee, deadlines and conditions for connection to the distribution
network,
7) Giving consent to the amount of fees for connection to the distribution network,
8) Issuance, renewal, transfer or revocation of licenses for production, distribution, supply, trade of electricity and
operators for renewable energy sources and cogeneration,
9) Issuance of prior consent for the construction of direct transmission lines in accordance with the implementing
act,
10) Adoption of the General Conditions for the supply of electricity and the Grid Code of distribution,
11) Adoption of a methodology on the manner of determining guaranteed purchase prices of electricity from
existence that use renewable sources and cogeneration,
12) Determination of the reference price of electricity for plants that use renewable sources and cogeneration,
13) Adoption of a methodology for determining the cost of coal, which is used for electricity production until
complete deregulation of production,
14) Determining the cost of coal for thermal power plants in accordance with the prescribed methodology for
determining the cost of coal used for electricity production until complete deregulation of production,
15) Prescribe the procedure and criteria for the selection of the Reserve Supplier, including the duration of the
Reserve Supplier's service, and supervise the application of the price of the Reserve Supplier's service,
16) Initiating the procedure for issuing misdemeanour warrants in accordance with the penal provisions of the law,
17) Adoption of a methodology for determining the quantities and prices for the calculation of electricity on the
basis of unauthorized consumption,
18) Conducting arbitration as determined in Articles 39 and 40 of the Law on Electricity in the Federation of Bosnia
and Herzegovina and other competencies prescribed by the Law on Electricity in the Federation of Bosnia and
Herzegovina
RERS’ basic competences within the electricity sector66

1) Supervision and regulation of relationships in electricity sector between producers, distributors, suppliers,
traders and customers,
2) Adoption of the methodology and criteria for determination of tariffs for the use of the distribution network,
methodology for determination of the price of the public supply, methodology for determination of the price of
the supply of last resort and the methodology for determination of the fee for connection to the distribution
network,
3) Adoption of tariff system for the sale of electricity and the use of the distribution network,
4) Determination of tariffs for users of distribution systems,
5) Issuance and revocation of licenses for performing activities: production, distribution, supply of tariff customers
with electricity and trade and supply of electricity on the territory of BiH, and licenses for construction of
electricity facilities,
66 The list is taken from the RERS annual report 2019 (https://reers.ba/wp-content/uploads/2020/12/Izvjestaj_RERS_2019_LAT_1_dio.pdf pages 7 and 8). The
text is corrected, since new Electricity Law is adopted in 2020 (RERS competences are specified in Article 28, which has 42 items)
DNV – Report No. , Rev. – www.dnv.com A-1

6) Adoption of General conditions for delivery and supply of electricity,
7) Protection of electricity customers,
8) Protection of electricity producers and customers, and other users of the distribution network who have been
unjustifiably denied access to the network or are dissatisfied with the conditions of access,
9) Issuance of certificates for production plants for production of electricity using renewable energy sources or
efficient cogeneration,
10) Issuance of guarantees of origin for electricity produced from renewable energy sources,
11) Adoption of a Rulebook on incentivization of the production of electricity from renewable sources and efficient
cogeneration, with the consent of the Government of the Republika Srpska,
12) Determination of the guaranteed purchase price and premium, with the consent of the Government of the
Republika Srpska,
13) Issuance of decision on the right on guaranteed purchase price and premium
14) Determination of fees for incentivization of the production of electricity from renewable sources and efficient
cogeneration, with the consent of the Government of the Republika Srpska
DNV – Report No. , Rev. – www.dnv.com A-2

APPENDIX B
Market concentration
A common concern in all market reforms is to what extent a competition-based set of market rules triggers incumbents
to exploit market power. Economies of scale have historically resulted in numerous countries with only one domestic
power producer. Moving from regulated to market-based prices will then not automatically lead to more efficient prices
or production. As shown in section 3.2, the BiH electricity generation is not as concentrated as one typically find
elsewhere in the Balkan region. In order to understand exactly how concentrated the market is, we have calculated two
metrics often used to analyse concentration: Herfindahl–Hirschman index (HHI) and residual supplier index (RSI)
The Herfindahl–Hirschman index calculated on annual figures is between 1400 and 2900 depending on whether import
capacity is considered or not and whether the calculation is based in energy or capacity.67 This illustrates the importance
of import capacity in limiting potential market power of the incumbent firms. An HHI score below 1500 indicates an
unconcentrated industry, while a score above 2500 indicates high concentration.
Table 10-1 HHI scores
Market share, Market share, Market share (e) Market share (c)
Group energy capacity squared squared
EP BiH 39% 27% 1 518 741
ERS 30% 21% 910 446
EP HZHB 17% 14% 282 208
TPP Stanari 13% 5% 182 23
WPP Jelovača 1% 1% 0 0
Import capacity 32%
HHI 2 893 1 418
The EPs are committed to deliver internally to the public supply companies. The market shares based on the
uncommitted capacity are somewhat lower for each market participant. As the uncommitted capacity obviously is lower
than the total capacity, the relative importance of the import capacity increases and the HHI score would be lower.
The residual supplier index is a metric illustrating to what extent one market participant is necessary to ensure all
demand is covered. An RSI below 1 indicates that the dominant firm potentially could have decided the market price
alone (if demand is completely inelastic in the short term). For all hours with a score above 1, it would have been hard, if
possible, for the dominant firm to determine the market price alone even if it wanted to. Typically, the calculation is
based on historical demand figures (or projected hourly demand for a future year) and available capacity for the largest
firm and all other firms, including import. In addition to consumption, it is common practice in RSI analyses to assume
that somehow, the supply side of the market is keeping some capacity available for ancillary services. The impact of this
assumption is to increase the perceived market power of the dominant firm.
We have calculated RSI for the largest firm, EP BiH, using hourly 2020 figures for actual consumption, but not
considering actual availability of plants and import capacity, and assuming 400 MW is reserved for ancillary services.
This yields an average value of 1.57. The score is close to or below 1 only in a few hours. The standard deviation is
0.25. Removing the assumption of reserves yields a score of 2.1, with a standard deviation of 0.44.
DNV – Report No. , Rev. – www.dnv.com B-1

3,00
RSI Dominant firm, 2020
2,50
2,00
RSI score
1,50
1,00
0,50
0,00
8760 hours
The conclusions from the HHI and the RSI analyses are consistent and tells us that the scope for exploitation of market
power in BiH is limited with the current market structure. The risks of moving to a fully market-based regime for
determining prices are thus limited
The Herfindahl–Hirschman index calculated on annual figures is between 1400 and 2900 depending on whether import
capacity is considered or not and whether the calculation is based in energy or capacity. This illustrates the importance
of import capacity in limiting potential market power of the incumbent firms.
Market Market Market Market
share, share, share (e) share (c)
Group energy capacity squared squared
EP BiH 39% 27% 1 518 741
ERS 30% 21% 910 446
EP HZHB 17% 14% 282 208
TPP Stanari 13% 5% 182 23
WPP Jelovača 1% 1% 0 0
Import capacity 32%
HHI 2 893 1 418
The residual supplier index, calculated for the largest firm, EP BiH, using hourly 2020 figures for actual consumption, but
not considering actual availability of plants and import capacity, and assuming 400 MW is reserved for ancillary services,
has an average value of 1.57. The score is close to or below 1 only in a few hours. The standard deviation is 0.25.
The RSI and the HHI analyses tell us that the scope for exploitation of market power is limited in BiH with the current
market structure and import opportunities.
DNV – Report No. , Rev. – www.dnv.com B-2

APPENDIX C
List of market participants
Wholesale market participants are obliged to register with NOSBiH, who then maintains a public list of all registered
traders:
DNV – Report No. , Rev. – www.dnv.com C-1

About DNV
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Report No.: , Rev.

Prepared by: Verified by: Approved by:

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Rev. No. Date Reason for Issue Prepared by Verified by Approved by

DNV – Report No. , Rev. – www.dnv.com Page i

3 OVERVIEW OF THE CURRENT ELECTRICITY SECTOR IN BiH ................................................................... 7

4 THE IMPORTANCE OF LIQUID COMPETITIVE MARKETS .......................................................................... 15

5 KEY OBSERVATIONS IN BIH ........................................................................................................................ 17

6 POTENTIAL BENEFITS OF A WELL-FUNCTIONING WHOLESALE MARKET FOR

7 RELEVANT MEASURES TO IMPROVE LIQUIDITY AND CONTESTABILITY .............................................. 32

8 PX-BASED SHORT-TERM MARKETS IN THE REGION ............................................................................... 65

9 CONCLUSIONS AND RECOMMENDATIONS ............................................................................................... 68

Appendix A Basic competences for the entity regulators

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3. Ensuring cross-border trade pass through the PX

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210915 Liquidity study - draft

210915 Liquidity study - draft

DNV – Report No. , Rev. – www.dnv.com Page 6

3.1 Regulators and key regulatory principles

• Law on Transmission, Regulator and Electricity System Operator,

• Law on Establishment of Transmission Company and

• Law on Establishment of the Independent System Operator,

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• SERC, the State Electricity Regulatory Commission,

• RERS, the Republika Srpska Energy Regulatory Commission.

DNV – Report No. , Rev. – www.dnv.com Page 8

3.2 Electricity producers and suppliers

Thermal Renewable Total % Thermal Renewable Total

EP BiH 4 527 1 444 5 971 39 1 181 523* 1 704

ERS 3 017 1 605 4 622 30 600 722 1 322

EP HZHB 2 573 2 573 17 903 903

TPP Stanari 2 068 2 068 13 300 300

WPP Jelovača 88** 88 32 32

Total 9 613 5 710 15 323 100 2 081 2 180 4 261

* In 2021, the 48 MW WPP Podveležje started operating

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3.3 Electricity consumption and supply

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Households Industrial Other Regulated Market-based

Figure 3-2 Total consumption per category (2020)17

17 Based on SERC Annual report 2020, section 3.7.

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• Managing the balancing energy market (see also section 3.7),

3.5 The balancing mechanism

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3.6 Cross-border trade and cooperation

• Montenegro – Bosnia and Herzegovina

• Croatia – Bosnia and Herzegovina

3.7 Wholesale trade, foreign market participants and neighbouring markets

25 SERC Annual report for 2020, December 2020

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• the volume of traded energy,

• the number of deals,

• the bid-ask spread30, and

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5.1 Organised markets

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• The lack of an organised wholesale market is a barrier to connecting RES